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Form 2119 is arranged so that such taxpayers are not required to
include any portion of the gain realized on the transaction in
their gross income, and they may postpone making an election
under section 121.6 However, such taxpayers are directed to
comply with additional filing requirements; i.e., to file a
second Form 2119. A taxpayer that files a second Form 2119
reporting the purchase of a new principal residence within the
statutory replacement period is permitted to make the election to
exclude up to $125,000 of gain under section 121 and/or to defer
recognition of gain under section 1034, as appropriate.7
Petitioners in the instant case reported on their original
Form 2119, filed August 26, 1996, that they realized gain on the
sale of the Solvang property and that they intended to purchase a
new principal residence within the statutory replacement period.
As a result, petitioners were not required to (and did not)
include any of the gain in their gross income for 1995, nor did
they make an election to exclude any portion of the gain from
6 Form 2119 allows taxpayers who may be eligible for the
tax benefits of sec. 121 and sec. 1034 in tandem the advantage of
delaying their election to use the one-time exclusion of gain
under sec. 121 until they have purchased a new principal
residence and are able to determine whether they qualify to defer
recognition of some or all of the gain under sec. 1034.
7 When a taxpayer qualifies for the tax benefits of both
sec. 121 and sec. 1034, in effect the first $125,000 of gain is
excluded under sec. 121, with the balance (to the extent invested
in a replacement residence) subject to deferral under sec. 1034.
See sec. 121(d)(7).
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