Divorced man can't defer gain on sale of former residence.
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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|Author:||Albanese, Maria Luzarraga|
|Publication:||Journal of Accountancy|
|Article Type:||Brief Article|
|Date:||May 1, 1997|
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