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from Brenda Summers, a friend of the family. He presented no
loan documents or credible proof of repayment. Accordingly,
petitioners have failed to prove that respondent's determination
regarding the gain realized is incorrect.
In the alternative, petitioner argues that the gain realized
on the sale of the California property should not be recognized
in 1989 pursuant to section 1034. Respondent contends that
petitioners are not entitled to deferral because the California
property was rented out beginning in 1985, which was more than 3
years prior to the date on which the property was sold.
Generally, sections 1001 and 61 require a taxpayer to
recognize in the year of the sale gain realized on the sale of
property. Section 1034, however, allows a taxpayer, in certain
circumstances, to defer recognition of gain realized on the sale
of the taxpayer's principal residence. Under section 1034, if
the taxpayer purchases a new principal residence within the
replacement period, the taxpayer will recognize gain on the sale
only to the extent that the taxpayer's adjusted sale price of the
old residence exceeds the taxpayer's cost of purchasing the new
residence. Sec. 1034(a).
As noted above, petitioner presented a statement at trial
which explains the process he used to arrive at the gain realized
on the California property. In particular, he calculated a total
of $35,320 in depreciation as follows:
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