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Divorced man can't defer gain on sale of former residence.

While married, Perry lived with his wife and daughter in a house in city A. In June 1984, he moved out but continued to pay the mortgage and other household expenses. Later that year, Perry moved to city B to live with a woman he ultimately married in 1987. Perry and his wife got divorced in December 1985. Part of the divorce agreement was that Perry's former wife and their daughter would continue to live in the house until December 1987, when it would be sold and the proceeds split. The house was sold in March 1988, and the proceeds were divided according to the divorce agreement.

On his 1988 tax return, Perry reported the sale of the house in city A but not any gain from the sale. He claimed the sale came under Internal Revenue Code section 1034, which allows a taxpayer to roll over the gain from the sale of a home if(1) it is his or her principal residence, (2) the taxpayer purchases a new residence within two years--before or after-the date the old residence is sold and (3) the cost of the new residence is equal to or greater than the adjusted sales price of the old residence. A taxpayer has to recognize gain only to the extent the cost of the new residence is less than the adjusted sales price of the old residence.

The IRS refused to allow the deferral, claiming the house had ceased to be Perry's principal residence when he moved out in June 1984. The IRS assessed tax, interest and penalties on his gain.

Result: For the IRS. Both the Tax Court and the Ninth Circuit Court of Appeals upheld the IRS decision. The Ninth Circuit found that Perry did not meet the condition that the home sold be his principal residence. To be a principal residence, a taxpayer has to use the premises as his or her actual home and must intend to stay there. In this case, Perry had long since ceased living in the house, had no intention of returning, had given exclusive use to his former wife and had made his "home" elsewhere since 1984. The court found the taxpayer's financial maintenance of the house alone did not make it his principal residence. In addition, one year after the sale of the house Perry and his second wife received nonrecognition treatment for the gain on the sale of their house in city B, where Perry had been residing since 1984. The court said that for purposes of the tax code, a person can have only "one" principal residence.

* Perry v. Commissioner (9th Cir. 7/31/96, aff'g TC 1994-247).
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Article Details
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Author:Albanese, Maria Luzarraga
Publication:Journal of Accountancy
Article Type:Brief Article
Date:May 1, 1997
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