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"ROLLOVER OF GAIN ON SALE OF PRINCIPAL RESIDENCE", requires
taxpayers, in certain circumstances, to defer recognition of gain
realized on the sale of their principal residence. Under section
1034, if a taxpayer sells a principal residence (old residence)
and, within a period beginning 2 years before the date of such
sale and ending 2 years after such sale, purchases a new
principal residence (new residence), then the taxpayer recognizes
gain realized on the sale only to the extent that the adjusted
sale price4 of the old residence exceeds the cost of purchasing
the new residence. Sec. 1034(a) and (b). Thus, by applying all
of the sale proceeds (net of selling costs) from the old
residence towards the purchase of a new residence, a taxpayer
defers recognition on all of the gain realized on the sale of the
taxpayer’s old residence. Sec. 1.1034-1(a), Income Tax Regs. If
less than all of the sale proceeds are so applied, the taxpayer
recognizes gain to the extent of the difference between the net
proceeds and the cost of the new residence, limited, however, to
the gain realized on the sale. Id. The provisions of section
1034 are mandatory. Sec. 1.1034-1, Income Tax Regs.
In order to qualify for the rollover treatment provided for
in section 1034, a taxpayer must purchase a new principal
residence within the replacement period. Whether a residence is
4The adjusted sale price is the amount realized (selling
price minus selling expenses) reduced by expenses of fixing up
the residence preparatory to sale. Sec. 1034(b).
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Last modified: May 25, 2011