Category: Individuals; Real Estate
Subject: Residence, Sale of
Title: Section 1034 Replacement of Personal Residence, Effect of Marital Status
IRC Sections: 1034, 6013
Filename: 1347.html
Date Produced: 11/94

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Facts
Taxpayer, a single man, sold his residence for $130,000. During 1994, he replaced the residence with a new home costing $200,000. The new home was purchased jointly with his fiancee. Presumably, the taxpayer has a 50% interest in the replacement residence. Accordingly, the taxpayer must recognize up to $30,000 of gain from the sale of the old residence.

Issue
Would the result set forth above be any different if the taxpayer marries his fiancee before the end of 1994 and files a joint return with her?

Answer
Although the issue does not seem to be specifically addressed in the tax literature, marriage to the fiancee prior to year end does not seem the change the result.

Discussion
The specific fact pattern set forth above does not seem to be addressed in the tax literature pertaining to the deferral of gain of the sale of a principal residence. Accordingly, it is necessary to reason out an answer based on the knowledge we have and the clues available to us. Although the matter is not free from doubt, it appears that marriage is not a viable tax planning strategy in this case for the following reasons.

1. Conceptually, in order for marriage to make a difference in this case, it would be necessary for married taxpayers to be treated as a single unit for tax purposes such that the act of one spouse is deemed to be an act on behalf of them both. It is clear that the act of filing a joint return does not make two taxpayers into one single taxpaying entity. The joint return election is merely a filing convenience which allows two separate taxpayers to combine their income, deductions, credits, etc. into one singe tax return. See Internal Revenue Code Section 6013 and Regulation Section 1.6013-4.

2. It is clear that under Section 1034, spouses (even those filing jointly) are not treated as a single unit for purposes of determining the necessary amount of proceeds that must be reinvested from the sale of a residence or in determining the amount of proceeds that have been reinvested. The tax literature is full of instances in which spouses have run afoul of the reinvestment rules by, for example, selling a home held in the name of one spouse and reinvesting the proceeds in a home held jointly by both spouses. If jointly filing spouses were treated as a unit for purposes of Section 1034, this problem would never occur in the first instance. In fact, there is a relief provision, Section 1034(g) which allows spouses to elect to effectively be treated as a single unit for purposes of Section 1034. (This election is not available to your client because the home in question must have been used by both spouses as their principal residence.) This election would not exist in the law if taxpayers were treated as a unit for purposes of Section 1034.