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which includes the following explanation regarding former section
112(n):
Whether or not property is used by the taxpayer as
his residence, and whether or not property is used by
the taxpayer as his principal residence (in the case of
a taxpayer using more than one place of residence),
depends upon all of the facts and circumstances in each
individual case, including the bona fides of the
taxpayer. The term “residence” is used in
contradistinction to property used in trade or business
and property held for the production of income.
Nevertheless, the mere fact that the taxpayer
temporarily rents out either the old or the new
residence may not, in the light of all the facts and
circumstances in the case, prevent the gain from being
not recognized. * * *
Where part of a property is used by the taxpayer
as his principal residence and part is used for
business purposes or in the production of income * * *
allocation must be made to determine the extent to
which the new subsection applies. If the old residence
is used only partially for residential purposes, a
proper allocation of the gain and of the selling price
is necessary; only that part of the gain allocable to
the residential portion may be not recognized under the
new subsection and only so much of the selling price as
is allocable to such part of the property need be
reinvested in the new residence.
* * * * * * *
Whenever a taxpayer sells property used as his
principal residence at a gain the statutory period
prescribed in section 275 [a predecessor to section
6501] of the Code for the assessment of any deficiency
attributable to any part of such gain will not expire
prior to the expiration of 3 years from the date the
Secretary is notified by the taxpayer, in accordance
with such regulations as the Secretary may prescribe,
of the cost of purchasing the new residence which the
taxpayer claims results in the nonrecognition of any
part of such gain, or of the taxpayer’s intention not
to, or failure to, purchase a new residence within the
period when such a purchase will result in the
nonrecognition of any part of such gain. Such a
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Last modified: May 25, 2011