Sean J. Swarthout and Michell L. Swarthout - Page 5




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               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 (as                    
               defined in subsection (b)) 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                   
                    residence, there shall be included only so much of                
                    his cost as is attributable to the acquisition,                   
                    construction, reconstruction, and improvements                    
                    made which are properly chargeable to capital                     
                    account, during the period specified in subsection                
                    (a).                                                              
          The “cost of purchasing the new residence,” within the meaning of           
          section 1034(a), includes only those costs under section                    
          1034(c)(2) which are attributable to the construction of a                  
          structure which is put into use as a residence during the                   
          relevant time period.  Elam v. Commissioner, 58 T.C. 238 (1972),            
          affd. 477 F.2d 1333 (6th Cir. 1973).  Thus, where taxpayers                 
          reside on a parcel of land in a temporary dwelling during the               
          construction of a separate structure on the same parcel intended            





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