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incurred in its construction included as part of their purchase
price for the section 1034 calculation. We agree with respondent
that residential use is an essential prerequisite to cost
inclusion.
Statutory Provisions
Under sections 1001 and 61, taxpayers generally must
recognize in the year of sale all gain or loss realized upon the
sale or exchange of property. Section 1034, however, provides an
exception which allows taxpayers to defer recognition of gain
when sale proceeds are reinvested in a new principal residence.
The section reads, in pertinent part, as follows:
SEC. 1034. ROLLOVER OF GAIN ON SALE OF PRINCIPAL
RESIDENCE.
(a) Nonrecognition of Gain.-–If property (in this
section called “old residence”) used by the taxpayer as
his principal residence is sold by him and, within a
period beginning 2 years before the date of such sale
and ending 2 years after such date, property (in this
section called “new residence”) is purchased and used
by the taxpayer as his principal residence, gain (if
any) from such sale shall be recognized only to the
extent that the taxpayer’s adjusted sales price * * *
of the old residence exceeds the taxpayer’s cost of
purchasing the new residence.
* * * * * * *
(c) Rules for Application of Section.-–For
purposes of this section:
* * * * * * *
(2) A residence any part of which was
constructed or reconstructed by the taxpayer shall
be treated as purchased by the taxpayer. In
determining the taxpayer’s cost of purchasing a
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