, Treasury § 1.1034–1

control of a corporation described in no investment in a new residence, sec- section 1033(a)(2)(A). tion 1034 is inapplicable and all of the gain shall be recognized. Whenever, as (Secs. 1033 (90 Stat. 1920, 26 U.S.C. 1033), and 7805 (68A Stat. 917, 26 U.S.C. 7805)) a result of the application of section 1034, any or all of the gain realized on [T.D. 6500, 25 FR 11910, Nov. 26, 1960; 25 FR the sale of an old residence is not rec- 14021, Dec. 31, 1960. Redesignated and amend- ed by T.D. 7625, 44 FR 31013, May 30, 1979; 44 ognized, a corresponding reduction FR 38458, July 2, 1979. Further redesignated must be made in the basis of the new and amended by T.D. 7758, 46 FR 6925, Jan. 22, residence. The provisions of section 1981; T.D. 7758, 46 FR 23235, Apr. 24, 1981; T.D. 1034 are mandatory, so that the tax- 8121, 52 FR 414, Jan. 6, 1987] payer cannot elect to have gain recog- nized under circumstances where this § 1.1033(h)–1 Effective date. section is applicable. Section 1034 ap- Except as provided otherwise in plies only to gains; losses are recog- § 1.1033(e)–1 and § 1.1033(g)–1, the provi- nized or not recognized without regard sions of section 1033 and the regula- to the provisions of this section. Sec- tions thereunder are effective for tax- tion 1034 affects only the amount of able years beginning after December 31, gain recognized, and not the amount of 1953, and ending after August 16, 1954. gain realized (see also section 1001 and (Secs. 1033 (90 Stat. 1920, 26 U.S.C. 1033), and the regulations issued thereunder). 7805 (68A Stat. 917, 26 U.S.C. 7805)) Any gain realized upon disposition of other property in exchange for the new [T.D. 6500, 25 FR 11910, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960. Redesignated and amend- residence is not affected by section ed by T.D. 7625, 44 FR 31013, May 30, 1979. 1034. For special rules relating to the Further redesignated and amended by T.D. sale or exchange of a principal resi- 7758, 46 FR 6925, Jan. 22, 1981] dence by a taxpayer who has attained age 65, see section 121 and paragraph § 1.1034–1 Sale or exchange of resi- (g) of § 1.121–5. For special rules relat- dence. ing to a case where real property with (a) Nonrecognition of gain; general respect to the sale of which gain is not statement. Section 1034 provides rules recognized under this section is reac- for the nonrecognition of gain in cer- quired by the seller in partial or full tain cases where a taxpayer sells one satisfaction of the indebtedness arising residence after December 31, 1953, and from such sale and resold by him with- buys or builds, and uses as his principal in 1 year after the date of such reacqui- residence, another residence within sition, see § 1.1038–2. specified time limits before or after (b) Definitions. The following defini- such sale. In general, if the taxpayer tions of frequently used terms are ap- invests in a new residence an amount plicable for purposes of section 1034 at least as large as the adjusted sales (other definitions and detailed expla- price of his old residence, no gain is nations appear in subsequent para- recognized on the sale of the old resi- graphs of this regulation): dence (see paragraph (b) of this section (1) Old residence means property used for definitions of adjusted sales price, by the taxpayer as his principal resi- new residence, and old residence). On the dence which is the subject of a sale by other hand, if the new residence costs him after December 31, 1953 (section the taxpayer less than the adjusted 1034(a); for detailed explanation see sales price of the old residence, gain is paragraph (c)(3) of this section). recognized to the extent of the dif- (2) New residence means property used ference. Thus, if an amount equal to or by the taxpayer as his principal resi- greater than the adjusted sales price of dence which is the subject of a pur- an old residence is invested in a new chase by him (section 1034(a); for de- residence, according to the rules stated tailed explanation and limitations see in section 1034, none of the gain (if any) paragraphs (c)(3) and (d)(1) of this sec- realized from the sale shall be recog- tion). nized. If an amount less than such ad- (3) Adjusted sales price means the justed sales price is so invested, gain amount realized reduced by the fixing- shall be recognized, but only to the ex- up expenses (section 1034(b)(1); for spe- tent provided in section 1034. If there is cial rule applicable in some cases to

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husband and wife, see paragraph (f) of (7) Cost of purchasing the new residence this section). means the total of all amounts which (4) Amount realized is to be computed are attributable to the acquisition, by subtracting, construction, reconstruction, and im- (i) The amount of the items which, in provements constituting capital ex- determining the gain from the sale of penditures, made during the period be- the old residence, are properly an offset ginning 18 months (one year in the case against the consideration received of a sale of an old residence prior to upon the sale (such as commissions and January 1, 1975) before the date of sale expenses of advertising the property of the old residence and ending either for sale, of preparing the deed, and of (i) 18 months (one year in the case of a other legal services in connection with sale of an old residence prior to Janu- the sale); from ary 1, 1975) after such date in the case (ii) The amount of the consideration of a new residence purchased but not so received, determined (in accordance constructed by the taxpayer, or (ii) two with section 1001(b) and regulations years (18 months in the case of a sale of issued thereunder) by adding to the an old residence prior to January 1, sum of any money so received, the fair 1975) after such date in the case of a market value of the property (other new residence the construction of than money) so received. If, as part of which was commenced by the taxpayer the consideration for the sale, the pur- before the expiration of 18 months (one chaser either assumes a liability of the year in the case of a sale of an old resi- taxpayer or acquires the old residence dence prior to January 1, 1975) after subject to a liability (whether or not such date (section 1034(a), (c)(2) and the taxpayer is personally liable on the (c)(5); for detailed explanation, see debt), such assumption or acquisition, paragraph (c)(4) of this section; for spe- in the amount of the liability, shall be cial rule applicable in some cases to treated as money received by the tax- husband and wife, see paragraph (f) of payer in computing the amount realized. this section; see also paragraph (b)(9) of (5) Gain realized is the excess (if any) this section for definition of purchase). of the amount realized over the ad- (8) Sale (of a residence) means a sale justed basis of the old residence (see also section 1001(a) and regulations or an exchange (of a residence) for issued thereunder). other property which occurs after De- (6) Fixing-up expenses means the ag- cember 31, 1953, an involuntary conver- gregate of the expenses for work per- sion (of a residence) which occurs after formed (in any taxable year, whether December 31, 1950, and before January beginning before, on, or after January 1, 1954, or certain involuntary conver- 1, 1954) on the old residence in order to sions where the disposition of the prop- assist in its sale, provided that such ex- erty occurs after December 31, 1957, in penses (i) are incurred for work per- respect of which a proper election is formed during the 90-day period ending made under section 1034(i)(2) (see sec- on the day on which the contract to tions 1034(c)(1), 1034(i)(1)(A), and sell the old residence is entered into; 1034(i)(2); for detailed explanation con- and (ii) are paid on or before the 30th cerning involuntary conversions, see day after the date of the sale of the old paragraph (h) of this section). residence; and (iii) are neither (a) al- (9) Purchase (of a residence) means a lowable as deductions in computing purchase or an acquisition (of a resi- taxable income under section 63(a), nor dence) on the exchange of property or (b) taken into account in computing the partial or total construction or re- the amount realized from the sale of construction (of a residence) by the the old residence (section 1034(b) (2) taxpayer (section 1034(c) (1) and (2)). and (3)). Fixing-up expenses does not in- However, the mere improvement of a clude expenditures which are properly residence, not amounting to recon- chargeable to capital account and struction, does not constitute purchase which would, therefore, constitute ad- of a residence. justments to the basis of the old resi- (c) Rules for application of section dence (see section 1016 and regulations 1034—(1) General rule; limitations on ap- issued thereunder). plicability. Gain realized from the sale

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(after December 31, 1953) of an old resi- missions and other selling expenses dence will be recognized only to the ex- from the selling price of his old resi- tent that the taxpayer’s adjusted sales dence, to determine the amount real- price of the old residence exceeds the ized. A comparison of the amount real- taxpayer’s cost of purchasing the new ized with the cost or other basis of the residence, provided that the taxpayer old residence will then indicate wheth- either (i) within a period beginning 18 er there is any gain realized on the months (one year in the case of a sale sale. Unless the amount realized is of an old residence prior to January 1, greater than the cost or other basis, no 1975) before the date of such sale and gain is realized and section 1034 does ending 18 months (one year in the case not apply. If the amount realized ex- of a sale of an old residence prior to ceeds the cost or other basis, the January 1, 1975) after such date pur- amount of such excess constitutes the chases property and uses it as his prin- gain realized. The amount realized cipal residence, or (ii) within a period should then be reduced by the fixing-up beginning 18 months (one year in the expenses (if any), to determined the ad- case of a sale of an old residence prior justed sales price. A comparison of the to January 1, 1975) before the date of adjusted sales price of the old residence such sale and ending two years (18 with the cost of purchasing the new months in the case of a sale of an old residence will indicate how much (if residence prior to January 1, 1975) after any) of the realized gain is to be recog- such date uses as his principal resi- nized. If the cost of purchasing the new dence a new residence the construction residence is the same as, or greater of which was commenced by him at any than, the adjusted sales price of the old time before the expiration of 18 months residence, then none of the realized (one year in the case of a sale of an old gain is to be recognized. On the other residence prior to January 1, 1975) after hand, if the cost of purchasing the new the date of the sale of the old residence residence is smaller than the adjusted (section 1034 (a) and (c)(5); for detailed sales price of the old residence, the explanation of use as principal residence gain realized, all of the gain realized is see subparagraph (3) of this paragraph). to be recognized to the extent of the The rule stated in the preceding sen- difference. It should be noted that any tence applies to a new residence pur- amount of gain realized but not recog- chased by the taxpayer before the date nized is to be applied as a downward of sale of the old residence provided the adjustment to the basis of the new resi- new residence is still owned by him on dence (for details see paragraph (e) of such date (section 1034(c)(3)). Whether this section).) The application of the the construction of a new residence general rule stated above may be illus- was commenced by the taxpayer before trated by the following examples: the expiration of 18 months (one year Example 1. A taxpayer decides to sell his in the case of a sale of an old residence residence, which has a basis of $17,500. To prior to January 1, 1975) after the date make it more attractive to buyers, he paints of the sale of the old residence will de- the outside at a cost of $300 in April, 1954. He pend upon the facts and circumstances pays for the painting when the work is fin- ished. In May, 1954, he sells the house for of each case. Section 1034 is not appli- $20,000. Brokers’ commissions and other sell- cable to the sale of a residence if with- ing expenses are $1,000. In October, 1954, the in the previous 18 months (previous taxpayer buys a new residence for $18,000. year in the case of a sale of an old resi- The amount realized, the gain realized, the dence prior to January 1, 1975) the tax- adjusted sales price, and the gain to be rec- payer made another sale of residential ognized are computed as follows: property on which gain was realized Selling price ...... $20,000 but not recognized (section 1034(d)). Less: Commissions and other selling expenses ..... 1,000 For further details concerning limita- Amount realized ...... 19,000 tions on the application of section 1034, Less: Basis ...... 17,500 see paragraph (d) of this section. Gain realized ...... 1,500 (2) Computation and examples. In ap- plying the general rule stated in sub- Amount realized ...... 19,000 paragraph (1) of this paragraph, the Less: Fixing-up expenses ...... 300 taxpayer should first subtract the com- Adjusted sales price ...... 18,700 135

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Cost of purchasing new residence ...... 18,000 NOTE: Since the cost of purchasing the new residence exceeds the adjusted sales price, Gain recognized ...... 700 none of the gain realized is recognized. Gain realized but not recognized ...... 800 Gain realized but not recognized ...... $1,500 Adjusted basis of new residence (see paragraph (e) of this section) ...... 17,200 Adjusted basis of new residence (see Example 2. The facts are the same as in ex- paragraph (e) of this section) ...... 16,500 ample (1), except that the selling price of the old residence is $18,500. The computations (3) Property used by the taxpayer as his are as follows: principal residence. (i) Whether or not Selling price ...... $18,500 property is used by the taxpayer as his Less: Commissions and other selling expenses ..... 1,000 residence, and whether or not property is used by the taxpayer as his principal Amount realized ...... 17,500 residence (in the case of a taxpayer Less: Basis ...... 17,500 using more than one property as a resi- Gain realized ...... 0 dence), depends upon all the facts and

NOTE: Since no gain is realized, section circumstances in each case, including 1034 is inapplicable; it is, therefore, unneces- the good faith of the taxpayer. The sary to compute the adjusted sales price of mere fact that property is, or has been, the old residence and compare it with the rented is not determinative that such cost of purchasing the new residence. No ad- property is not used by the taxpayer as justment to the basis of the new residence is his principal residence. For example, if to be made. the taxpayer purchases his new resi- Example 3. The facts are the same as in ex- dence before he sells his old residence, ample (1), except that the cost of purchasing the new residence is $17,000. The computa- the fact that he temporarily rents out tions are as follows: the new residence during the period be- Selling price ...... $20,000 fore he vacates the old residence may Less: Commissions and other selling expenses ..... 1,000 not, in the light of all the facts and cir- cumstances in the case, prevent the Amount realized ...... 19,000 new residence from being considered as Less: Basis ...... 17,500 property used by the taxpayer as his Gain realized ...... 1,500 principal residence. Property used by the taxpayer as his principal residence Amount realized ...... 19,000 Less: Fixing-up expenses ...... 300 may include a houseboat, a house trail- er, or stock held by a tenant-stock- Adjusted sales price ...... 18,700 holder in a cooperative housing cor- Cost of purchasing the new residence ...... 17,000 poration (as those terms are defined in Gain recognized ...... 1,500 section 216(b) (1) and (2)), if the dwell- ing which the taxpayer is entitled to NOTE: Since the adjusted sales price of the occupy as such stockholder is used by old residence exceeds the cost of purchasing the new residence by $1,700, which is more him as his principal residence (section than the gain realized, all of the gain real- 1034(f)). Property used by the taxpayer ized is recognized. No adjustment to the as his principal residence does not in- basis of the new residence is to be made. clude personal property such as a piece Gain realized but not recognized ...... $0 of furniture, a radio, etc., which, in ac- cordance with the applicable local law, Example 4. The facts are the same as in ex- ample (1), except that the fixing-up expenses is not a fixture. are $1,100. The computations are as follows: (ii) Where part of a property is used Selling price ...... $20,000 by the taxpayer as his principal resi- Less: Commissions and other selling expenses ..... 1,000 dence and part is used for other pur- poses, an allocation must be made to Amount realized ...... 19,000 determine the application of this sec- Less: Basis ...... 17,500 tion. If the old residence is used only Gain realized ...... 1,500 partially for residential purposes, only that part of the gain allocable to the Amount realized ...... 19,000 Less: Fixing-up expenses ...... 1,100 residential portion is not to be recog- nized under this section and only an Adjusted sales price ...... 17,900 amount allocable to the selling price of Cost of purchasing the new residence ...... 18,000 such portion need be invested in the Gain recognized ...... 0 new residence in order to have the gain 136

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allocable to such portion not recog- attributable to the last 18 months (last nized under this section. If the new res- year in the case of a sale of an old resi- idence is used only partially for resi- dence prior to January 1, 1975) of such dential purposes only so much of its construction constitutes the taxpayer’s cost as is allocable to the residential cost of purchasing the new residence, portion may be counted as the cost of for purposes of section 1034. Further- purchasing the new residence. more, the taxpayer’s cost of purchasing (4) Cost of purchasing new residence. (i) the new residence includes only such The taxpayer’s cost of purchasing the amounts as are properly chargeable to new residence includes not only cash capital account rather than to current but also any indebtedness to which the expense. As to what constitutes capital property purchased is subject at the expenditures, see section 263. time of purchase whether or not as- (iii) The provisions of this subpara- sumed by the taxpayer (including pur- graph may be illustrated by the fol- chase-money mortgages, etc.) and the lowing example: face amount of any liabilities of the taxpayer which are part of the consid- Example: M began the construction of a new residence on January 15, 1974, and com- eration for the purchase. Commissions pleted it on October 14, 1974. The cost of and other purchasing expenses paid or $45,000 was incurred ratably over the 9-month incurred by the taxpayer on the pur- period of construction. On December 14, 1975, chase of the new residence are to be in- M sold his old residence and realized a gain. cluded in determining such cost. In the In determining the extent to which the real- case of an acquisition of a residence ized gain is not to be recognized under sec- upon an exchange which is considered tion 1034, M’s cost of constructing the new as a purchase under this section, the residence shall include only the $20,000 which was attributable to the June 15—October 14, fair market value of the new residence 1974, period (4 months at $5,000). The $25,000 on the date of the exchange shall be balance of the cost of constructing the new considered as the taxpayer’s cost of residence was not attributable to the period purchasing the new residence. Where beginning 18 months before the date of the any part of the new residence is ac- sale of the old residence and ending two quired by the taxpayer other than by years after such date and, under section 1034, purchase, the value of such part is not is not properly a part of M’s cost of con- to be included in determining the tax- structing the new residence. payer’s cost of the new residence (see (d) Limitations on application of section paragraph (b)(9) of this section for defi- 1034. (1) If a residence is purchased by nition of purchase). For example, if the the taxpayer prior to the date of the taxpayer acquires a residence by gift or sale of the old residence, the purchased inheritance, and spends $20,000 in re- residence shall, in no event, be treated constructing such residence, only such as a new residence if such purchased $20,000 may be treated as his cost of residence is sold or otherwise disposed purchasing the new residence. of by him prior to the date of the sale (ii) The taxpayer’s cost of purchasing of the old residence (section 1034(c)(3)). the new residence includes only so And, if the taxpayer, during the period much of such cost as is attributable to within which the purchase and use of acquisition, construction, reconstruc- the new residence must be made in tion, or improvements made within the order to have any gain on the sale of period of three years or 42 months (two the old residence not recognized under years or 30 months in the case of a sale this section, purchases more than one of an old residence prior to January 1, property which is used by him as his 1975), as the case may be, in which the principal residence during the 18 purchase and use of the new residence months (or two years in the case of the must be made in order to have gain on construction of the new residence) suc- the sale of the old residence not recog- ceeding the date of the sale of the old nized under this section. Thus, if the residence, only the last of such prop- construction of the new residence is erties shall be considered a new resi- begun three years before the date of dence (section 1034(c)(4)). In the case of sale of the old residence and completed a sale of an old residence prior to Janu- on the date of sale of the old residence, ary 1, 1975, the period of 18 months (or only that portion of the cost which is two years) referred to in the preceding

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sentence shall be one year (or 18 (2) The following example will illus- months). If within 18 months (one year trate the rule of subparagraph (1) of in the case of a sale of an old residence this paragraph: prior to January 1, 1975) before the date Example: On January 1, 1954, the taxpayer of the sale of the old residence, the tax- buys a new residence for $10,000. On March 1, payer sold other property used by him 1954, he sells for an adjusted sales price of as his principal residence at a gain, and $15,000 his old residence, which has an ad- any part of such gain was not recog- justed basis to him of $5,000 (no fixing-up ex- nized under this section or section penses are involved, so that $15,000 is the 112(n) of the of amount realized as well as the adjusted sales 1939, this section shall not apply with price). Between April 1 and April 15 a wing is constructed on the new house at a cost of respect to the sale of the old residence $5,000. Between May 1 and May 15 a garage is (section 1034(d)). constructed at a cost of $2,000. The adjusted (2) The following example will illus- basis of the new residence is $10,000 during trate the rules of subparagraph (1) of January and February, $5,000 during March, this paragraph: $5,000 following the completion of the con- struction in April, and $7,000 following the Example: A taxpayer sells his old residence completion of the construction in May. on January 15, 1954, and purchases another Since the old residence was not sold until residence on February 15, 1954. On March 15, March 1, no adjustment to the basis of the 1954, he sells the residence which he bought new residence is made during January and on February 15, 1954, and purchases another February. Computations for March, April, residence on April 15, 1954. The gain on the and May are as follows: sale of the old residence on January 15, 1954, Amount realized on sale of old resi- will not be recognized except to the extent to dence ...... $15,000 which the taxpayer’s adjusted sales price of Less: Adjusted basis of old residence ... 5,000 the old residence exceeds the cost of pur- chasing the residence which he purchased on Gain realized on sale of old residence .. 10,000 March 1, 1954 April 15, 1954. Gain on the sale of the resi- Adjusted sales price of old residence ... 15,000 dence which was bought on February 15, 1954, Less: Cost of purchasing new resi- and sold on March 15, 1954, will be recog- dence ...... 10,000 nized. Gain recognized ...... 5,000 (e) Basis of new residence. (1) Where the purchase of a new residence results, Gain realized but not recognized ...... 5,000 under this section, in the nonrecogni- Cost of purchasing new residence ...... 10,000 tion of any part of the gain realized Less: Gain realized but not recognized 5,000 upon the sale of an old residence, then, in determining the adjusted basis of Adjusted basis of new residence ...... 5,000 April 15, 1954 the new residence as of any time fol- Gain realized on sale of old residence .. 10,000 lowing the sale of the old residence, the Adjusted sales price of old residence ... 15,000 adjustments to basis shall include a re- Less: Cost of purchasing new resi- duction by an amount equal to the dence ...... 15,000 amount of the gain which was not rec- Gain recognized ...... 0 ognized upon the sale of the old resi- dence (section 1034(e); for special rule Gain realized but not recognized ...... 10,000 applicable in some cases to husband Cost of purchasing new residence ...... 15,000 and wife, see paragraph (f) of this sec- Less: Gain realized but not recognized 10,000 tion). Such a reduction is not to be Adjusted basis of new residence ...... 5,000 made for the purpose of determining the adjusted basis of the new residence May 15, 1954 as of any time preceding the sale of the Gain realized on sale of old residence .. 10,000 old residence. For the purpose of this Adjusted sales price of old residence ... 15,000 Less: Cost of purchasing new resi- determination, the amount of the gain dence ...... 17,000 not recognized under this section upon the sale of the old residence includes Gain recognized ...... 0 only so much of the gain as is not rec- Gain realized but not recognized ...... 10,000 ognized because of the taxpayer’s cost, up to the date of the determination of Cost of purchasing new residence ...... 17,000 the adjusted basis, of purchasing the Less: Gain realized but not recognized 10,000 new residence. Adjusted basis of new residence ...... 7,000 138

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(f) Husband and wife. (1) If the tax- funds for the purchase of their new principal payer and his spouse file the consent residence which they hold as tenants in com- referred to in this paragraph, then the mon, each owning an undivided one-half in- taxpayer’s adjusted sales price of the old terest therein. If the taxpayer and his wife file the required consent, the gain of $5,000 residence shall mean the taxpayer’s, or upon the sale of the old residence will not be the taxpayer’s and his spouse’s, ad- recognized to the taxpayer, and the adjusted justed sales price of the old residence, basis of the taxpayer’s interest in the new and the taxpayer’s cost of purchasing the residence will be $2,500 and the adjusted basis new residence shall mean the cost to the of his wife’s interest in such property will be taxpayer, or to his spouse, or to both of $2,500. them, of purchasing the new residence, Example 2. A taxpayer and his wife, in 1954, whether such new residence is held by sell for an adjusted sales price of $10,000 their the taxpayer, or his spouse, or both principal residence, which they own as joint tenants and which has an adjusted basis of (section 1034(g)). Such consent may be $2,500 to each of them ($5,000 together) (no filed only if the old residence and the fixing-up expenses are involved, so that new residence are each used by the tax- $10,000 is the amount realized as well as the payer and his same spouse as their adjusted sales price). Within a year after such principal residence. If the taxpayer and sale, the wife spends $10,000 of her own funds his spouse do not file such a consent, in the purchase of a principal residence for the recognition of gain upon sale of the herself and the taxpayer and takes title in old residence shall be determined under her name only. If the taxpayer and his wife this section without regard to the fore- file the required consent, the adjusted basis to the wife of the new residence will be going. $5,000, and the gain of the taxpayer will be (2) The consent referred to in sub- $2,500 upon the sale of the old residence will paragraph (1) of this paragraph is a not be recognized. The wife, as a taxpayer consent by the taxpayer and his spouse herself, will have her gain of $2,500 on the to have the basis of the interest of ei- sale of the old residence not recognized ther of them in the new residence re- under the general rule. duced from what it would have been (g) Members of Armed Forces. (1) Sec- but for the filing of such consent by an tion 1034(h) provides a special rule for amount by which the gain of either of members of the Armed Forces with re- them on the sale of his interest in the spect to the period after the sale of the old residence is not recognized solely old residence within which the acquisi- by reason of the filing of such consent. tion of a new residence may result in a Such reduction in basis is applicable to non-recognition of gain on such sale. the basis of the new residence, whether The running of the period of 18 months such basis is that of the husband, of the (one year in the case of a sale of an old wife, or divided between them. If the residence prior to January 1, 1975) after basis is divided between the husband the sale of the old residence in the case and wife, the reduction in basis shall be of the purchase of a new residence, or divided between them in the same pro- the period of two years (18 months in portion as the basis (determined with- the case of a sale of an old residence out regard to such reduction) is di- prior to January 12, 1975) after such vided. Such consent shall be filed with sale in the case of the construction of the district director with whom the a new residence, is suspended during taxpayer filed the return for the tax- any time that the taxpayer serves on able year or years in which the gain extended active duty with the Armed from the sale of the old residence was Forces of the United States. (This realized. paragraph applies to time served on ex- (3) The following examples will illus- tended active duty prior to July 1, 1973, trate the application of this rule: only if such extended active duty oc- Example 1. A taxpayer, in 1954, sells for an curred during an induction period as adjusted sales price of $10,000 the principal defined in section 112(c)(5) as in effect residence of himself and his wife, which he prior to July 1, 1973.) However, in no owns individually and which has an adjusted event may such suspension extend for basis to him of $5,000 (no fixing-up expenses are involved, so that $10,000 is the amount re- more than four years after the date of alized as well as the adjusted sales price). the sale of the old residence the period Within a year after such sale he and his wife within which the purchase or construc- contribute $5,000 each from their separate tion of a new residence may result in a

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nonrecognition of gain. For example, if days or for an indefinite period. If the the taxpayer is on extended active duty call or order is for a period of more with the Army from January 1, 1975, to than 90 days, it is immaterial that the June 30, 1976, and if he sold his old resi- time served pursuant to such call or dence on January 10, 1975, the latest order is less than 90 days, if the reason date on which the taxpayer may use a for such shorter period of service oc- new residence constructed by him and curs after the beginning of such duty. have any part of the gain on the sale of As to what constitutes active service his old residence not recognized under as a member of the Armed Forces of this section is June 30, 1978 (the date the United States, see paragraph (i) of two years following the taxpayer’s ter- § 1.112–1. As to who are members of the mination of active duty). However, if Armed Forces of the United States, see this taxpayer were on extended active section 7701(a)(15), and the regulations duty with the Army from January 1, in part 301 of this chapter (Regulations 1975, to December 31, 1978, the latest on Procedure and Administration). date on which he might use a new resi- (h) Special rules for involuntary conver- dence constructed by him and have any sions—(1) In general. Except as provided part of the gain on the sale of his old in subparagraph (2) of this paragraph, residence not recognized under this section 1034 is inapplicable to involun- section would be January 10, 1979 (the tary conversions of personal residences date four years following the date of occurring after December 31, 1953 (sec- the sale of the old residence). tion 1034(i)(1)(B)). For purposes of sec- (2) This suspension covers not only tion 1034, an involuntary conversion of the Armed Forces service of the tax- a personal residence occurring after payer but if the taxpayer and his same December 31, 1950, and before January spouse used both the old and the new residences as their principal residence, 1, 1954, is treated as a sale of such resi- then the extension applies in like man- dence (section 1034(i)(1)(A); see para- ner to the time the taxpayer’s spouse is graph (b)(8) of this section). For pur- on extended active duty with the poses of this paragraph, an involuntary Armed Forces of the United States. conversion is defined, as the destruc- (3) The time during which the run- tion in whole or in part, theft, seizure, ning of the period is suspended is part requisition, or condemnation of prop- of such period. Thus, construction erty, or the sale or exchange of prop- costs during such time are includible in erty under threat or imminence there- the cost of purchasing the new resi- of. See section 1033 and § 1.1033(a)–3 for dence under paragraph (c)(4) of this treatment of residences involuntarily section. converted after December 31, 1953. (4) The running of the period of 18 (2) Election to treat condemnation of months (or two years) after the date of personal residence as sale. (i) Section sale of the old residence referred to in 1034(i)(2) provides a special rule which section 1034(c)(4) and in paragraph (d) permits a taxpayer to elect to treat the of this section is not suspended. The seizure, requisition, or condemnation running of the 18-month period prior to of his principal residence, or the sale or the date of the sale of the old residence exchange of such residence under within which the new residence may be threat or imminence thereof, if occur- purchased in order to have gain on the ring after December 31, 1957, as the sale sale of the old residence not recognized of such residence for purposes of sec- under this section is also not sus- tion 1034 (relating to sale or exchange pended. In the case of a sale of an old of residence). A taxpayer may thus residence prior to January 1, 1975, the elect to have section 1034 apply, rather periods of 18 months (or two years) re- than section 1033 (relating to involun- ferred to in each of the two preceding tary conversions), in determining the sentences shall be one year (or 18 amount of gain realized on the disposi- months). tion of his old residence that will not (5) The term extended active duty be recognized and the extent to which means any period of active duty which the basis of his new residence acquired is served pursuant to a call or order to in lieu thereof shall be reduced. Once such duty for a period in excess of 90 made, the election shall be irrevocable.

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(ii) If the taxpayer elects to be gov- of three years from the date of receipt, erned by the provisions of section 1034, by the district director with whom the section 1033 will have no application. return was filed for the taxable year or Thus, a taxpayer who elects under sec- years in which the gain from the sale tion 1034(i)(2) to treat the seizure, req- of the old residence was realized (sec- uisition, or condemnation of his prin- tion 1034(j)), of a written notice from cipal residence (but not the destruc- the taxpayer of— tion), or the sale or exchange of such (i) The taxpayer’s cost of purchasing residence under threat or imminence the new residence which the taxpayer thereof, as a sale for the purpose of sec- claims result in nonrecognition of any tion 1034 must satisfy the requirements part of such gain. of section 1034 and this section. For ex- (ii) The taxpayer’s intention not to ample, under section 1034 a taxpayer purchase a new residence within the generally must replace his old resi- period when such a purchase will result dence with a new residence which he in nonrecognition of any part of such uses as his principal residence, within a gain, or period beginning 18 months (one year (iii) The taxpayer’s failure to make in the case of a sale of an old residence such a purchase within such period. prior to January 1, 1975) before the date Any gain from the sale of the old resi- of disposition of his old residence, and dence which is required to be recog- ending 18 months (one year in the case nized shall be included in of a sale of an old residence prior to for the taxable year or years in which January 1, 1975) after such date. How- such gain was realized. Any deficiency ever, in the case of a new residence the attributable to any portion of such construction of which was commenced gain may be assessed before the expira- by the taxpayer within such period, the tion of the 3-year period described in replacement period shall not expire this paragraph, notwithstanding the until 2 years (18 months in the case of provisions of any law or rule of law a sale of an old residence prior to Janu- which might otherwise bar such assess- ary 1, 1975) after the date of disposition ment. of the old residence. (2) The notification required by the (iii) Time and manner of making elec- preceding subparagraph shall contain tion. The election under section all pertinent details in connection with 1034(i)(2) shall be made in a statement the sale of the old residence and, where attached to the taxpayer’s applicable, the purchase price of the return, when filed, for the taxable year new residence. The notification shall during which the disposition of his old be in the form of a written statement residence occurs. The statement shall and shall be accompanied, where appro- indicate that the taxpayer elects under priate, by an amended return for the section 1034(i)(2) to treat the disposi- year in which the gain from the sale of tion of his old residence as a sale for the old residence was realized, in order purposes of section 1034, and shall also to reflect the inclusion in gross income show— for that year of gain required to be rec- (a) The basis of the old residence; ognized in connection with such sale. (b) The date of its disposition; (j) Effective date. Pursuant to section (c) The adjusted sales price of the old 7851(a)(1)(C), paragraphs (a), (b), (c), (d), residence, if known; and (f), (g), and (i) of this section apply in (d) The purchase price, date of pur- the case of any sale (as defined in para- chase, and date of occupancy of the graph (b)(8) of this section) made after new residence if it has been acquired December 31, 1953, although such sale prior to the time of making the elec- may occur in a taxable year subject to tion. the Internal Revenue Code of 1939. (i) Statute of limitations. (1) Whenever Similarly, the rule in paragraph (h) of a taxpayer sells property used as his this section that involuntary conver- principal residence at a gain, the statu- sions of personal residences are not to tory period prescribed in section 6501(a) be treated as sales for purposes of sec- for the assessment of a deficiency at- tion 1034 but are governed by section tributable to any part of such gain 1033 applies to any such involuntary shall not expire prior to the expiration conversion made after December 31,

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1953, although such involuntary con- 1035 except for the fact that the prop- version may occur in a taxable year erty received in exchange consists not subject to the Internal Revenue Code of only of property which could otherwise 1939. The rule in paragraph (e) of this be received without the recognition of section requiring an adjustment to the gain or loss, but also of other property basis of a new residence, the purchase or money, see section 1031 (b) and (c) of which results (under section 1034, or and the regulations thereunder. Such section 112(n) of the Internal Revenue an exchange does not come within the Code of 1939) in the nonrecognition of provisions of section 1035. Determina- gain on the sale of an old residence, ap- tion of the basis of property acquired plies in determining the adjusted basis in an exchange under section 1035(a) of the new residence at any time fol- shall be governed by section 1031(d) and lowing such sale, although such sale the regulations thereunder. may occur in a taxable year subject to the Internal Revenue Code of 1939. § 1.1036–1 Stock for stock of the same corporation. [T.D. 6500, 25 FR 11910, Nov. 26, 1960, as amended by T.D. 6916, 32 FR 5924, Apr. 13, (a) Section 1036 permits the ex- 1967; 32 FR 6971, May 6, 1967; T.D. 7404, 41 FR change, without the recognition of gain 6758, Feb. 13, 1976; T.D. 7625, 44 FR 31013, May or loss, of common stock for common 30, 1979] stock, or of preferred stock for pre- ferred stock, in the same corporation. § 1.1035–1 Certain exchanges of insur- Section 1036 applies even though voting ance policies. stock is exchanged for nonvoting stock Under the provisions of section 1035 or nonvoting stock is exchanged for no gain or loss is recognized on the ex- voting stock. It is not limited to an ex- change of: change between two individual stock- (a) A contract of life insurance for holders; it includes a transaction be- another contract of life insurance or tween a stockholder and the corpora- for an endowment or annuity contract tion. However, a transaction between a (section 1035(a)(1)); stockholder and the corporation may (b) A contract of endowment insur- qualify not only under section 1036(a), ance for another contract of endow- but also under section 368(a)(1)(E) (re- ment insurance providing for regular capitalization) or section 305(a) (dis- payments beginning at a date not later tribution of stock and stock rights). than the date payments would have The provisions of section 1036(a) do not begun under the contract exchanged, or apply if stock is exchanged for bonds, an annuity contract (section 1035(a)(2)); or preferred stock is exchanged for or common stock, or common stock is ex- (c) An annuity contract for another changed for preferred stock, or com- annuity contract (section 1035(a)(3)), mon stock in one corporation is ex- but section 1035 does not apply to such changed for common stock in another exchanges if the policies exchanged to corporation. See paragraph (l) of sec- not relate to the same insured. The ex- tion 1301–1 for certain transactions change, without recognition of gain or treated as distributions under section loss, of an annuity contract for another 301. See paragraph (e)(5) of § 1.368–2 for annuity contract under section certain transactions which result in 1035(a)(3) is limited to cases where the deemed distributions under section same person or persons are the obligee 305(c) to which sections 305(b)(4) and 301 or obligees under the contract received apply. in exchange as under the original con- (b) For rules relating to recognition tract. This section and section 1035 do of gain or loss where an exchange is not apply to transactions involving the not wholly in kind, see subsections (b) exchange of an endowment contract or and (c) of section 1031. For rules relat- annuity contract for a life insurance ing to the basis of property acquired in contract, nor an annuity contract for an exchange described in paragraph (a) an endowment contract. In the case of of this section, see subsection (d) of such exchanges, any gain or loss shall section 1031. be recognized. In the case of exchanges (c) A transfer is not within the provi- which would be governed by section sions of section 1036(a) if as part of the

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