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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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