Magazine article The CPA Journal

Tax Court Denies Nonrecognition of Gain on Sale of Residence Due to Divorce

Magazine article The CPA Journal

Tax Court Denies Nonrecognition of Gain on Sale of Residence Due to Divorce

Article excerpt

In Perry v. Commissioner, the Tax Court recently ruled that a taxpayer who moved out of his residence in anticipation of a divorce could not use the nonrecognition provisions of IRC Sec. 1034(a) because the residence was not his "principal residence at the time of its subsequent sale."

Sec. 1034(a) allows the nonrecognition of gain on the sale of a principal residence if, within two years, the taxpayer purchases a new principal residence costing at least as much as the adjusted sales price of the old residence. Neither Sec. 1034 nor the regulations define "principal residence." The regulations use "facts and circumstances" to determine whether the taxpayer is using the property as his or her principal residence.

Previous cases have allowed taxpayers to use the nonrecognition provisions of IRC Sec. 1034(a) when they were not living in the residence at the time of its sale only when taxpayers were unable to sell the residence due to the real estate market. In Clapham v. Commissioner; the taxpayers left the residence in 1966 with no intention of returning. They attempted to sell it, but were unable to do so until 1969. Meanwhile, they rented it intermittently. Nevertheless, the Tax Court ruled that it was their principal residence.

Curtis and Laura A. Perry married in 1973, resided in their Irvine, California residence from 1979 until June 15, 1984. On that date, Curtis moved out in anticipation of a divorce. He took some personal possessions with him, but left other such possessions at the Irvine residence. A few months later Curtis moved into the residence of Laura L. Perry, his present wife. Curtis continued to pay the mortgage, proper taxes, insurance, and utilities on the Irvine residence until June 1985, at which time he began paying alimony and child support. Laura A. Perry then paid the mortgage, but Curtis continued to pay one-half of the other expenses and make repairs on the residence without charge. The divorce became final on December 17, 1985. It provided that Laura A. Perry would have exclusive use of the Irvine residence until December 17, 1987, at which time it would be sold and Curtis would receive one-half of the proceeds. …

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