James D. Schlicher - Page 10

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          residence exceeds the cost of property purchased and used as a              
          new principal residence within 2 years before or after the date             
          of sale.  Moreover, where part of the new residence purchased is            
          used as the taxpayer's principal residence and part is used for             
          business purposes, only the portion of the cost allocable to the            
          residential use is entitled to section 1034(a) nonrecognition.              
          Beckwith v. Commissioner, T.C. Memo. 1964-254; Grace v.                     
          Commissioner, T.C. Memo. 1961-252; sec. 1.1034-1(c)(3)(ii),                 
          Income Tax Regs.  Thus, pursuant to section 1034(a) and the                 
          regulations thereunder, only the portion of the Clayton property            
          used by petitioner as his principal residence during the 2-year             
          period following the sale of the Livermore property may be                  
          included in the cost of purchasing such residence.  Whether or              
          not property is used by a taxpayer as his residence depends upon            
          all the facts and circumstances in each case, including the good            
          faith of the taxpayer.  Thomas v. Commissioner, 92 T.C. 206, 243            
          (1989); sec. 1.1034-1(c)(3)(i), Income Tax Regs.                            

                              (A) for work performed during the 90-day                
                         period ending on the day on which the contract to            
                         sell the old residence is entered into;                      
                              (B) which are paid on or before the 30th day            
                         after the date of the sale of the old residence;             
                              (C) which are--                                         
                                   (i) not allowable as deductions in                 
                              computing taxable income under section 63               
                              (defining taxable income), and                          
                                   (ii) not taken into account in computing           
                              the amount realized from the sale of the old            

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