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respondent’s contention that section 1041 applies to this
transaction.6
Petitioner husband relies on section 1.1034-1(c)(4), Income
Tax Regs., for his assertion that he is entitled to include the
entire outstanding mortgage balance on the new residence in the
calculation of his acquisition cost. Section 1.1034-1(c)(4),
Income Tax Regs., provides that the taxpayer's cost of purchasing
the new residence includes not only cash but also any
indebtedness to which the property purchased is subject at the
time of purchase whether or not assumed by the taxpayer and the
face amount of any liabilities of the taxpayer which are part of
the consideration for the purchase. Petitioner husband maintains
that he is entitled to include the entire outstanding mortgage on
the property in his cost of purchasing the replacement residence
despite the fact that he owns the King of Prussia property with
his spouse. Petitioner husband entered into a private agreement
in July of 1989 in which he agreed to assume one-half of the
mortgage indebtedness of the King of Prussia property. This
agreement states that the transfer of one-half of the property to
petitioner husband was in exchange for his assumption of one-half
of the mortgage indebtedness. We hold that petitioner husband’s
6Respondent contends that when the provisions for deferral
of recognition of gain on the sale of a residence under section
1034 overlap the provision of sec. 1041 for married spouses, the
provisions of sec. 1041 apply (a matter on which we express no
opinion).
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