Category: Individuals; Real Estate; Nontaxable Exchanges
Subject: Principal Residence, Sale of
Title: Multiple Replacement Properties
IRC Sections: 1034(c)(4)
Filename: 1157.html
Date Produced: 6/96

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Background
Taxpayers sold their old home (OLD) at a substantial gain. Within the two year replacement period, the taxpayers purchased (in August, 1995) a residence in Connecticut which they occupied as their principal residence. At about the same time, the taxpayers purchased a second residence in New York for about $200,000, considerably less than the selling price of OLD.

The taxpayers now wish to switch residences, occupying the NY house as their principal residence and keeping the CT house as a second residence. They wish to accomplish the switch as soon as possible without jeopardizing the deferral of gain into the CT residence.

Issue
How long must the taxpayers occupy the CT residence as their principal residence in order to protect the deferral of gain with respect to the sale of OLD?

Answer
The taxpayers must occupy the CT residence as their principal residence until the end of the two-year replacement period following the sale of OLD.

Discussion
Section 1034(c)(4) provides as follows.

If the taxpayer, during the period described in subsection (a), purchases more than one residence which is used by him as the principal residence at some time within 2 years after the date of the sale of the old residence, only the last of such residences so used by him after the date of such sale shall constitute the new residence. If a principal residence is sold in a sale to which subsection (d)(2) applies within 2 years after the sale of the old residence, for purposes of applying the preceding sentence with respect to the old residence, the principal residence so sold shall be treated as the last residence used during such 2-year period. [Emphasis supplied.]

I think this provision stands on its own. If the taxpayers within the two year replacement period purchase and occupy as their principal residence some house other than the CT residence (i.e., the New York residence), then only the second of those residences (the NY residence) will be viewed as the replacement residence for the sale of OLD, which sale gave rise to the large gain the taxpayers hoped to defer into the CT residence.

Accordingly, if the taxpayers wish to defer the gain realized on the sale of OLD, they must stay with the CT house as their principal residence until two years after the sale of OLD.