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residence is less than the cost of the new residence. Sec.
1034(a), (c). Section 1034(b)(1) defines "adjusted sales price" as
the amount realized on the sale of the old residence (selling price
minus selling expenses) reduced by expenses of fixing up the
residence in preparation for sale. Thus, if the cost of the new
residence equals or exceeds the adjusted sale price of the old
residence, the entire gain on the sale of the old residence must be
deferred. (We note that section 1034 is mandatory, so that a
taxpayer cannot elect to have gain recognized where the section is
applicable. Sec. 1.1034-1(a), Income Tax Regs.) If the cost of
the new residence is less than the adjusted sale price of the old
residence, gain must be recognized to the extent the adjusted sale
price of the old residence exceeds the cost of the new residence,
but not greater than the amount realized on the sale. Sec. 1.1034-
1(a), Income Tax Regs. The deferral of 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 (i.e., the unrecognized
gain is rolled over into a lower basis for the new residence).
Sec. 1034(e). Finally, pursuant to section 1.1034-1(i)(1), Income
Tax Regs., any gain recognized from the sale of the old residence
is includable in gross income for the taxable year in which the
gain was realized. (Section 1034 does not apply to losses; losses
are recognized or not recognized without regard to the provisions
of section 1034.)
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Last modified: May 25, 2011