Rev. Rul. 88-29

1988-1 C.B. 75, 1988-18 I.R.B. 16.

                       Internal Revenue Service

                                 Revenue Ruling

               EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE

                             Published: May 2, 1988

SECTION 121. - ONE-TIME EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE BY INDIVIDUAL WHO HAS ATTAINED AGE 55, 26 CFR 1.121-3: Definitions

  Exclusion of gain from sale of principal residence. A gain realized from the relinquishment of rights in a rent-controlled apartment cannot be excluded from gross income under section 121 of the Code.

ISSUE

  Under section 121 of the Internal Revenue Code, may an individual elect to exclude from gross income the gain realized from the relinquishment of rights with respect to a rent-controlled apartment subject to the New York City Rent and Rehabilitation Law?

FACTS

  A, age 60, has resided for 25 years in an apartment unit the lease of which is governed by the provisions of the New York City Rent and Rehabilitation Law, sections 26-401 through 26-415, N.Y. Unconsol. Laws (McKinney Supp. 1986). Provided the tenant continues to pay rent, this law prohibits the eviction of a rent-controlled tenant, except on limited grounds. During 1987, A realized a gain upon receiving a payment from the owner of the apartment building to relinquish all rights A had under this law with respect to the unit.

LAW AND ANALYSIS

  Section 121(a) of the Code allows a taxpayer to elect to exclude gain from the sale or exchange of property from gross income if (1) the taxpayer has attained age 55 before the date of the sale or exchange, and (2) during the 5- year period ending on the date of the sale or exchanges, the property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 3 years or more. Under section 121(b), the amount of gain excluded from gross income may not exceed $125,000.

  Section 1.121-3(a) of the Income Tax Regulations states that the term  'principal residence' has the same meaning as in section 1034 of the Code (relating to sale or exchange of residence).

  In Rev. Rule. 84-43, 1984-1 C.B. 27, B owned a life estate in a residence that B had used as a principal residence for 10 years. The life estate was B's entire interest in the residence. Rev. Rul. 84-43 concludes that B may elect under section 121 of the Code to exclude from gross income up to $125,000 of the gain from the sale of the life estate. Rev. Rul. 84-43 states that the section 121 is to apply if an elderly taxpayer disposes of the taxpayer's entire interest (legal and equitable) in a principal residence. It is not necessary that the taxpayer own the entire fee interest in such residence.

  Rev. Rul. 72-266, 1972-1 C.B. 227, concludes that the present value of future lease payments of 50 years' duration cannot be included in the purchase price of a new principal residence, as the lease payments were to be directed at property in which the taxpayer would not acquire any equity. Therefore, the nonrecognition provisions of section 1034 of the Code did not apply.

  Rev. Rul. 72-266, was cited with approval in Boesel v. Commissioner, 65 T.C. 378 (1975), a case involving taxpayers who sold their old residence in Connecticut and one week later purchased a new residence in California that was constructed on land originally leased to the seller for 75 years. The taxpayers assumed the ground lease for its remaining 73-year term and attempted to capitalize the value of the future payments under the lease for purposes of calculating the gain to be currently recognized under section 1034 of the Code. The court rejected the taxpayers' interpretation of the law and stated that nonrecognition of gain under section 1034 may be permitted only to the extent that a taxpayer holds fee simple title (or equivalent forms of ownership) to property that is occupied as a principal residence.

  Although the New York City Rent and Rehabilitation Law gives tenants substantial possessory rights by restricting the ability of a landlord to evict a rent-controlled tenant, a tenant may be evicted on a variety of grounds, largely concerning the tenant's wrongful conduct within the apartment unit. See section 26-408(a), NY Unconsolidated Laws. In addition, the landlord may obtain a certificate of eviction from the New York City rent agency if the landlord requires the apartment for personal use, if the tenant does not actually live in the unit, or if the landlord intends to substantially alter, remodel, or demolish the unit. Moreover, the statute does not give rent-controlled tenants all the rights and privileges of ownership, such as the right to freely sublet the property and the right to transfer the property by gift or sale. The statutory restrictions on A's ability to use, occupy, and transfer the rent- controlled apartment confirm that A's interest is that of a lessee and not an owner.

  As Boesel Rev. Rul. 72-266 indicate, a lease interest cannot qualify as an ownership interest in a principal residence for purposes of section 1034 of the Code, and an ownership interest is required to qualify for nonrecognition of gain under section 1034. Similarly, a lease interest does not qualify for the section 121 exclusion. Rev. Rul. 84-43 is distinguishable because a life estate is an ownership interest.

HOLDING

  A may not elect under section 121 of the Code to exclude from gross income any gain realized from the relinquishment of A's statutory rights in the rent- controlled apartment.

Rev. Rul. 88-29, 1988-1 C.B. 75, 1988-18 I.R.B. 16.