Academic journal article Journal of Accountancy

Sale of Residence by Bankruptcy Estate

Academic journal article Journal of Accountancy

Sale of Residence by Bankruptcy Estate

Article excerpt

The Tax Reform Act of 1997 significantly changed the taxation of the sale of a personal residence. Under the new law, taxpayers can exclude up to $250,000 ($500,000 on a joint return) of the gain on the sale of a home they have used as a principal residence for two out of the last five years. Since the law refers to use by a "taxpayer," a question arises: Can an entity take advantage of this exclusion?

Luciano Popa filed a petition under chapter 7 of the U.S. Bankruptcy Code. Later, he petitioned the Bankruptcy Court asking that the bankruptcy estate be given permission to "abandon" Popa's residence on the grounds that he had no equity in the property. Although the value of the house exceeded the outstanding mortgage, Popa asserted the value would be zero if the gain resulting from a sale were taxable. The bankruptcy trustees argued the gain from the sale was nontaxable under the newly enacted IRC section 121 and, therefore, the estate should not release the residence.

Result: The bankruptcy estate is entitled to use section 121. The avail ability of the old section 121, which excluded the gain on the sale of a residence by a taxpayer over age 55 to a bankruptcy estate, was previously considered in In re Mehr and In re Barden. …

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