Lee F. Parker and Diane K. Parker - Page 5




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          remained in the original home.  At the time of trial, petitioner            
          had been working on the project for more than 6 years, and the              
          date of completion remained uncertain.                                      
                                       OPINION                                        
               We must decide whether petitioners’ expenditures in                    
          constructing a separate structure for future residential use are            
          properly included as part of the cost of their new principal                
          residence for purposes of section 1034.  If so, petitioners are             
          entitled to defer recognition of gain on the sale of their former           
          residence.  If not, petitioners are liable for the deficiency               
          determined by respondent.                                                   
               Petitioners contend that the separate structure should be              
          viewed as an addition, albeit detached, to their existing                   
          residence.  Further, petitioners assert that a mere addition or             
          capital improvement to an established new residence need not be             
          placed into actual residential use in order for costs incurred in           
          its construction to be added to the total purchase price for                
          purposes of section 1034.                                                   
               Conversely, respondent contends that failure by petitioners            
          to use the separate structure as a principal residence within the           
          statutory time period defeats their attempt to have costs                   











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