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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. 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 4-year replacement period begins 2 years before the date
of the sale of the old residence and ends 2 years after such
date. Sec. 1034(a). If, however, during the 4-year replacement
period, the taxpayer purchases more than one residence that is
used by him as his principal residence at some time within 2
years after the date of the sale of the old residence, only the
last of such residences is treated as the new residence. Sec.
1034(c)(4).
Petitioner contends that the Castro Valley house was his old
principal residence and the condominium was his new principal
residence. Petitioner concludes, that since he purchased and
used the condominium as his new principal residence within 2-
years prior to the sale of the Castro Valley house, he is
required by section 1034(a) to defer recognition of the gain on
the sale of the house.
Respondent argues that section 1034(a) does not apply
because (1) the Castro Valley house was not petitioner's
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