Rev. Rul. 81-53

1981-1 C.B. 439, 1981-7 I.R.B. 14.

                       Internal Revenue Service
                                 Revenue Ruling

            RESIDENCE; REPLACEMENT PERIOD; PURCHASE OF MORE THAN ONE

                          Published: February 17, 1981

SECTION 1034.-- ROLLOVER OF GAIN ON SALE OF PRINCIPAL RESIDENCE, 26 CFR 1.1034- 1: Sale or exchange of residence

  Residence; replacement period; purchase of more than one. A taxpayer sold house A at a gain, constructed and occupied house B within 18 months, sold house B at a gain and bought house C within 24 months of the sale of house A. Even though the constructed residence, house B, was occupied within 18 months of the sale of house A, the 24-month replacement period specified in section 1034(c)(5) of the Code applies, and under subsection (c)(4) house C is the replacement residence for nonrecognition of gain on house A.

ISSUE

  In the situation described below, what is the proper application of the nonrecognition of gain provisions of section 1034 of the Internal Revenue Code of 1954?

FACTS

  The taxpayer sold principal residence A, where taxpayer had lived for 10 years, at a gain in January 1978, and moved into principal residence B in the same month.  The taxpayer had begun construction of residence B in 1977.  In December 1979, after residing in B for 23 months, the taxpayer sold residence B at a gain and purchased and occupied residence C. The taxpayer was at all times below age 55, and none of the residences were purchased as a result of a change in the taxpayer's principal place of employment.  With each successive acquisition, the taxpayer paid a price that exceeded the adjusted sales price of the previous residence.

LAW AND ANALYSIS

  Section 1034(a) of the 1954 Code provides that if the taxpayer's principal residence ('old residence') is sold and if a 'new residence' is purchased and used as the taxpayer's principal residence within a period beginning 18 months before the sale of the old residence and ending 18 months after the sale, then any gain from the sale shall be recognized only to the extent that the 'adjusted sales price' (as defined in section 1034(b)(1)) of the old residence exceeds the taxpayer's cost of purchasing the new residence.

  Section 1034(c)(4) of the 1954 Code contains the following provision:

    If the taxpayer, during the period described in subsection (a), purchases more than one residence which is used by him as his principal residence at some time within 18 months after the date of the sale of the old residence, only the last of such residence so used by him after the date of such sale shall constitute the new residence.

  Section 1034(c)(5) of the 1954 Code provides as follows:

    In the case of a new residence the construction of which was commenced by the taxpayer before the expiration of 18 months after the date of the sale of the old residence, the period specified in subsection (a), and the 18 months referred to in paragraph (4) of this subsection, shall be treated as including a period of 2 years beginning with the date of the sale of the old residence.

  The taxpayer who constructs a replacement residence is given the benefit of an additional 6 months to occupy the residence and have it qualify as a new residence for the purposes of section 1034 of the 1954 Code.  See S. Rep. No. 781 (Supp.), Part 2, 82d Cong., 1st Sess. 33 (1951), 1951-2 C.B. 545, 566, regarding section 112 of the Internal Revenue Code of 1939, predecessor to section 1034 of the 1954 Code.  In those situations in which a taxpayer is permitted to extend the 18-month replacement period of section 1034(a) of the 1954 Code as a result of subsection (c)(5), the period in subsection (c)(4) is likewise extended to 2 years.

  The taxpayer in the present case has constructed and occupied a new residence before the expiration of 18 months after the sale of the old residence. Subsections (c)(4) and (c)(5) of section 1034 of the 1954 Code therefore require application of a 2-year limitation with respect to the acquisition of residences.  Since residence C was the last residence purchased and used as taxpayer's principal residence during this 2-year period, residence C is the new residence for purposes of applying section 1034(a) to the sale of residence A.

HOLDING

  The gain on the sale of residence A is subject to nonrecognition under section 1034 of the 1954 Code.  With respect to this sale,

residence C is the new residence for purposes of section 1034(a).

Rev. Rul. 81-53, 1981-1 C.B. 439, 1981-7 I.R.B. 14.