Academic journal article Journal of Accountancy

Taxpayers Who Built New Home Denied Exclusion

Academic journal article Journal of Accountancy

Taxpayers Who Built New Home Denied Exclusion

Article excerpt

The Tax Court held that a married couple could not exclude gain under IRC [section] 121 from the sale of a house that they had never lived in, built after they had demolished their former residence on the same site. The court held that Congress intended that the exclusion should apply only when the property sold includes the dwelling that has been used as a principal residence for the requisite period.

Section 121 generally permits married taxpayers to exclude up to $500,000 of gain from the sale or exchange of property if, during the five-year period ending on the date of the sale or exchange, the property has been owned and used by the taxpayer as the taxpayer's principal residence for a period of, or periods totaling, at least two years. Gain from the separate sale of land adjacent to a principal residence can also qualify for the exclusion if that sale occurs two years before or after the sale of the dwelling.

David Gates purchased an 880-square-foot home in California in 1984. He married Christine Gates in 1989. The couple wanted to remodel and enlarge the home, but after being informed by an architect of new building codes, the couple in 1999 decided to demolish the old house and build a new one more than double its size. The Gateses never lived in the new house and sold it in 2000 at a gain of $591,406. …

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