Internal Revenue Service
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 Rev. Rul. 76-84

1976-1 C.B. 219

Section 1033

IRS Headnote

Involuntary conversions; rental residence replaced by personal. The investment of proceeds from an involuntary conversion of a residence held for the production of rental income in a new residence used by the taxpayer solely as a personal residence does not qualify as a conversion into property held either for productive use in a trade or business or for investment under section 1033(g) of the Code; Rev. Rul. 70-466 amplified.

Full Text

Rev. Rul. 76-84

Advice has been requested as to the application of section 1033(g) of the Internal Revenue Code of 1954 to the facts in Rev. Rul. 70-466, 1970-2 C.B. 165.

In Rev. Rul. 70-466, the taxpayer, an individual, owned a residence that was rented for residential purposes. The property was condemned by the state and a gain was realized by the taxpayer on the condemnation. The condemnation proceeds were then used by the taxpayer to purchase a new residence that was used solely as the taxpayer's personal residence.

Section 1033(a) of the Code provides, in part, that if property is, as a result of condemnation, compulsorily or involuntarily converted into money and the taxpayer, during the period specified, purchases other property similar or related in service or use to the property so converted, at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion exceeds the cost of such property.

Section 1033(g)(1) of the Code states that where condemned property is real property held for productive use in a trade or business or for investment (and not primarily for sale), property of a "like kind," to be held for productive use in a trade or business or for investment purposes, will be treated as similar or related in service or use to the property so converted.

Rev. Rul. 70-466 holds, under the fact pattern described above, that the investment of proceeds from an involuntary conversion of a residence held for the production of rental income in a new residence occupied by the taxpayer does not qualify as replacement property similar or related in service or use to the property converted within the meaning of section 1033(a) of the Code. As to the property converted, the taxpayer in Rev. Rul. 70-466 was held to be an investor for the production of rental income. However, as to the property acquired as replacement, Rev. Rul. 70-466 holds that the taxpayer is merely an owner-occupant and is no longer using the property for the production of rental income.

The specific question presented in the instant case is whether section 1033(g) of the Code should have been applied to the facts presented in Rev. Rul. 70-466 and, if so, whether another conclusion should have been reached. Section 1033(g) applies only to cases where the replacement property is "to be held for productive use in trade or business or for investment." Since the facts in Rev. Rul. 70-466 indicate that the replacement property is to be used as a personal residence, section 1033(g) can have no application.

Accordingly, Rev. Rul. 70-466, is amplified to hold that reinvestment of proceeds from an involuntary conversion of a residence held for the production of rental income in a new residence used by the taxpayer solely as a personal residence does not qualify as property held for investment under section 1033(g) of the Code. Since the new residence also fails to meet the alternative requirement for qualified replacement property under section 1033(g), that is, it is not held for productive use in a trade or business since it is used solely as a personal residence, the gain realized on the conversion is recognized in full.

Rev. Rul. 70-466 is amplied.