Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 60-76

1960-1 C.B. 296

Sec. 1034

IRS Headnote

Where a taxpayer sells his principal residence and, within one year from the date of sale, becomes a tenant-shareholder of a cooperative housing corporation within the meaning of section 1034(f) of the Internal Revenue Code of 1954, the cost of the taxpayer's new residence includes an amount equal to that portion of any unpaid purchase-money mortgage on the building owned by such corporation on the date of purchase of the stock interest, if such portion is properly allocable to the taxpayer's apartment and must be paid by him as a condition of retaining his stock interest in the corporation.

Full Text

Rev. Rul. 60-76

Advice has been requested concerning the determination, under the circumstances described below, of the cost of a taxpayer's new residence for the purposes of section 1034 of the Internal Revenue Code of 1954.

In 1956, the taxpayer sold his principal residence at a gain. Within one year from the date of sale, the taxpayer purchased a stock interest in a cooperative housing corporation as defined in section 216 of the Code. As a tenant-shareholder, the taxpayer had the right to lease and occupy a designated apartment solely for his own personal use in the apartment building owned by such corporation. The taxpayer exercised this right and, within one year of the original sale, occupied the leased apartment as his new principal residence.

At the date of the stock purchase, the cooperative's apartment building was subject to a purchase-money mortgage. This indebtedness had been allocated among the apartments in proportion to the fair market value of each apartment. As the apartment building consisted solely of apartment units, each held by a tenant-shareholder as defined by section 216 of the Code, the indebtedness was allocated to each apartment in the same ratio as the stock interest attributed to each such apartment bore to the sum total of the stock interest attributed to all of the apartments.

Under the terms of his lease, the taxpayer, in addition to the other annual charges, is obligated to pay his proportionate share of the interest and principal payments due annually on the mortgage. To secure performance of this and the other annual obligations, the taxpayer's stock interest is pledged with the corporation. In addition, the lease also provides that, in the event of liquidation of the corporation, the taxpayer's distributive share of corporate assets is to be reduced by the unpaid balance of his proportionate share of the mortgage debt.

Section 1034 of the Code provides, in part, that if a taxpayer sells property used as his principal residence and, within one year before or after the date of sale, purchases property which he uses as his new principal residence, any gain realized on the sale is recognized only to the extent that the adjusted sales price of the old residence exceeds the cost of the new residence. That section also provides that property used by a taxpayer as his principal residence includes stock held by a tenant-stockholder of a cooperative housing corporation, as these terms are defined by section 216 of the Code, if, in the case of the stock purchased, the taxpayer uses the dwelling which he is entitled to occupy as a tenant-stockholder as his principal new residence.

Section 1.1034-1(c)(4)(i) of the Income Tax Regulations provides that the taxpayer's cost of purchasing a new residence includes any indebtedness to which the property is subject at the time of purchase, whether or not assumed by the taxpayer, and the face amount of any obligations given by the taxpayer as part of the consideration for the purchase.

Section 216 of the Code, in part, defines a cooperative housing corporation as a corporation in which each of the stockholders is entitled, by reason of his stock ownership, to occupy for dwelling purposes an apartment in a building owned by such corporation. That section defines a tenant-stockholder as an individual who is a stockholder in a cooperative housing corporation and whose paidup stock interest bears, to the satisfaction of the Secretary of the Treasury or his delegate, a reasonable relationship to the fair market value of the corporate equity in the buildings and land attributable to the tenant-shareholder's apartment.

Where property is purchased subject to a mortgage, the mortgage debt is a lien on the property. Thus, it ordinarily must be discharged by the purchaser as a condition of retaining the property, even though he is not personally liable thereon. See Glenn on Mortgages, Vol. 2, section 256. A failure to discharge the mortgage debt ordinarily empowers the mortgagee to have the property sold at public auction. On a sale, the purchaser receives only the amounts realized in excess of the outstanding mortgage debt and the costs incurred on the sale. See Glenn on Mortgages, Vol. 2, section 261.

The effect of the instant arrangement is identical to a purchase of property subject to an indebtedness. The taxpayer is obligated by contract to discharge that portion of the mortgage debt which is properly allocable, in value, to the apartment used by him as his principal residence. To secure this obligation, his stock interest is pledged with the corporation. Thus, on a failure to discharge the obligation, the corporation is empowered to have the taxpayer's stock interest sold at public auction. On such a sale, the taxpayer would only receive the amounts realized in excess of his unpaid share of the mortgage debt and the cost incurred. Similarly, on liquidation of the corporation, the taxpayer's distributive share is reduced by the unpaid portion of his share of the debt. Thus, his allocable share of the debt constitutes a lien on the taxpayer's stock interest.

Accordingly, it is held that, in these circumstances, the effect of the instant arrangement is identical to a purchase of a residence which is subject to an indebtedness and the taxpayer's cost of purchasing his stock as a tenant-stockholder, within the meaning of section 1034 of the Code, includes an amount equal to the taxpayer's proportionate share of the unpaid portion of the purchase-money mortgage on the building owned by the cooperative housing corporation on the date of the purchase of his stock interest. Compare I.T. 1469, C.B. I-2, 191 (1922).