Category: Individuals; Real Estate, Nontaxable Exchanges Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Taxpayer's (TP's) are husband and wife living in separate residences. One of the residences has been sold and TP's wish to defer the gain on the sale under §1034. TP's file jointly and plan to continue doing so. The issue is whether gain on the sale of the residence is eligible for §1034 deferral treatment. The facts of this case are extremely unusual to say the least. Not surprisingly, there seems to be nothing authoritative which is directly on point. There are numerous cases in which taxpayers have owned multiple residential properties. Since §1034 only applies to the taxpayer's principal residence, the courts have looked at all the related facts and circumstances to determine which of the multiple residences should be considered the taxpayer's principal residence. There is no indication that a taxpayer can simultaneously have more than one principal residence except in the narrow case in which the principal residence is vacated and held for sale and meanwhile the taxpayer moves into a replacement residence. Since married couples filing jointly are treated as one taxpayer, it follows that only one of the houses in question could be considered TP's principal residence. It seems fairly safe to synopsize the existing case law on this issue by saying that absent a compelling reason to think otherwise, the residence in which the taxpayer spends the most time will be considered the taxpayer's principal residence. The conclusion in this case seems to be TP's will have to choose which residence they feel is their principal residence and treat the other as a second home not eligible for §1034 treatment. Based on our telephone conversation, you feel that the least-used residence in the one TP's just sold. Accordingly, it would appear that absent a compelling reason to think otherwise, the recently sold residence would not be subject to §1034 deferral. It seems to me that some thought should be given to the following. 1. Would the conclusion under §1034 be different if TP's filed separately in the year of sale and the year of reinvestment? 2. What would be the tax cost of filing separately? |
