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to be the permanent residence, the cost of its construction
cannot be taken into account under section 1034(a) unless it is
put into use as a residence before the expiration of the time
period. See id.; Lokan v. Commissioner, T.C. Memo. 1979-380.
It is undisputed that petitioners sold the Pod residence on
October 30, 1995, but did not occupy the newly constructed
residence on the Robinhood property until some time after October
30, 1997; i.e., after the expiration of the 2-year period allowed
by section 1034(a). Therefore, the cost of constructing the new
residence cannot be taken into account under section 1034(a).
None of the arguments offered by petitioners at trial overcomes
the fact that the newly constructed residence was not put into
use as such within the required time frame; taxpayers must meet
the strict requirements of section 1034(a) to be entitled to the
nonrecognition of gain. See id.
At most, petitioners could argue that the “cost of
purchasing the new residence” includes the cost of the mobile
home--rather than the newly constructed residence--along with the
cost of the underlying property. However, section 1034(a) does
not change the requirement that gain must be recognized on the
sale of the old residence to the extent that the adjusted sales
price of the old residence exceeds the cost of the new residence.
The sales price of the Pod residence was $310,000, while
petitioners spent only $111,000 in obtaining the Robinhood
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