- 27 -
replacement period,21 the taxpayer will recognize gain on the
sale only to the extent that the taxpayer's adjusted sales
price22 of the old residence exceeds the taxpayer's cost of
purchasing the new residence. Sec. 1034(a). Thus, if the cost
of the new residence equals or exceeds the adjusted sales price
of the old residence, the entire gain will be deferred. If the
cost of the new residence is less than the adjusted sales price
of the old residence, gain will be recognized to the extent of
the difference. Sec. 1.1034-1(a), Income Tax Regs. The deferral
of the gain is accomplished by reducing the basis of the new
residence by the amount of gain not recognized on the sale of the
old residence. Sec. 1034(e).
The Burlington House as Principal Residence
Whether a residence is used by a taxpayer as his or her
principal residence depends on all the facts and circumstances of
each case. Thomas v. Commissioner, 92 T.C. 206, 242-243 (1989);
sec. 1.1034-1(c)(3)(i), Income Tax Regs. Property is used by a
taxpayer as a residence if that taxpayer physically occupies or
lives in that property. United States v. Sheahan, 323 F.2d 383,
386 (5th Cir. 1963); Bayley v. Commissioner, 35 T.C. 288, 295
21 The replacement period begins 2 years before and ends 2
years after the date of the sale of the old residence. Sec.
1034(a).
22 The adjusted sale price is the amount realized (selling
price minus selling expenses) reduced by any expenses of fixing
up the old residence in order to assist in its sale. Sec.
1034(b).
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