J. Ramsay Farah and Elizabeth Farah - Page 21

               2.   The South Point Road Lot                                          
               Having decided that the gain on the sale of Berlin house was           
          excludable under section 121, we now must determine whether the             
          gain on the adjacent South Point Road lot is also excludable.               
          Generally, gain from the sale or exchange of vacant land is not             
          excludable under section 121 unless--                                       
                    (A) The vacant land is adjacent to land containing                
               the dwelling unit of the taxpayer’s principal                          
                    (B) The taxpayer owned and used the vacant land as                
               part of the taxpayer’s principal residence;                            
                    (C) The taxpayer sells or exchanges the dwelling                  
               unit in a sale or exchange that meets the requirements                 
               of section 121 within 2 years before or 2 years after                  
               the date of the sale or exchange of the vacant land;                   
                    (D) The requirements of section 121 have otherwise                
               been met with respect to the vacant land.                              
          Sec. 1.121-1(b)(3)(i), Income Tax Regs.                                     
               Respondent contends that the South Point Road lot was owned            
          by the Family Partnership, and therefore, petitioners are not               
          entitled to exclude the gain under section 121.  Petitioners                

          an increase in basis of $282,054 with respect to the cost of                
          improvements, taxes, and settlement charges.  Accordingly, the              
          adjusted basis of the Berlin house at the time of sale was either           
          $597,054 or $647,054.  The parties stipulated that petitioners              
          received net sales proceeds of $752,582.  Therefore, petitioners            
          realized a capital gain of either $103,528 or $153,528 on the               
          sale of the Berlin house.  As both of these amounts are less than           
          the $500,000 exclusion, we need not decide the basis of the                 
          Berlin house.                                                               

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