¹Congress enacted major changes to the residence-sale provisions in the Taxpayer Relief Act of 1997, Section 312(a). Proposed regulations were issued on Oct. 10, 2000. The IRS issued final Regs. Sec. 1.121-1 through -4 (TD 9030, 12/24/03), effective for sales and exchanges after Dec. 23, 2002. It also issued Temp. Regs. Sec. 1.121-3T(b)(f), (h), (k) and (l) (and identical Prop. Regs. Sec. 1.121-3(b)(f), (h), (k) and (l)) on that date. For rules on electing to apply the provisions retroactively, see Regs. Sec. 1.121-4(j).

²Alternatively, T would meet the two-out-of-five-year test if she owned and used the Evanston home as her principal residence for at least 24 months in the 60-month period up to and including the sale date; see Regs. Sec. 1.121-1(c)(1). The regulations are unclear how a month is determined. For instance, T moved out of the Evanston home on June 10, 2003; does that count as a month of use? Normally, this lack of precision will be unimportant (as it is for T), but that will not always be the case.

³See Form 1040, Schedule D, Instructions (2002), p. D-1 and IRS Pub. 523, Selling Your Home (2002), p. 2. If T had received Form 1099-S, Proceeds From Real Estate Transactions, she might want to show the transaction on her return and then reduce the reported gain to zero by showing Sec. 121 Exclusion and a $155,000 loss on Schedule D below the reported gain.

⁴Regs. Sec. 1.121 does not have a table of contents. A chart summarizing the contents is available from the author at dilleys@bus.msu.edu.

⁵These factors were added to the final regulations in response to comments on the proposed regulations. They were used in various court cases under repealed Sec. 1034 and former Sec. 121 to determine the taxpayers principal residence. For each factor, comments have been included on how they apply to T from Example 1.

⁶The preamble states: The final regulations continue to provide that the residence that the taxpayer uses a majority of the time during the year will ordinarily be considered the taxpayers principal residence. However, this test is not dispositive. The final regulations also include a nonexclusive list of factors that are relevant in identifying a property as a taxpayers principal residence; see TD 9030, note 1 supra.

⁷James M. Guinan, DC AZ, 4/9/03.

⁸See Regs. Sec. 1.121-1(b)(2) and (4), Examples (1) and (2).

⁹See Regs. Sec. 1.121-1(c)(2)(i) and (4), Example (2).

¹⁰Under Regs. Sec. 1.121-1(e)(2), dwelling unit has the same meaning as in Sec. 280A(f)(1), but does not include appurtenant structures or other property.

¹¹See Form 4797 Instructions (2002), p. 2.

¹²See Regs. Sec. 1.121-1(e)(4), Example (4).

¹³See Form 8582 Instructions (2002), p. 7.

¹⁴Sec. 469 and its regulations do not specifically address this situation. However, a similar loss of carryforwards can occur when a taxpayer dies and the basis of passive activity property is stepped up by an amount exceeding the loss carryforwards; see Sec. 469(g)(2).

¹⁵In Regs. Sec. 1.121-1(e)(1), residential purpose refers to the use of a dwelling unit in a manner that qualifies under Sec. 121; nonresidential purpose refers to the use of a dwelling unit in a manner that does not qualify under Sec. 121.

¹⁶See also IRS Pub. 523, note 3 supra, p. 17.

¹⁷Clayburn M. Bennett, ND GA, 10/6/61.

¹⁸Samuel E. Bogley, 263 F2d 746 (4th Cir. 1959).

¹⁹James Schlicher, TC Memo 1997-37.

²⁰See Regs. Sec. 1.121-1(b)(3)(ii) and (b)(4), Example (3). Had O had sold the second parcel of property before filing his 2003 tax return, he could have excluded the $72,000 from the vacant land sale on his original 2003 return.

²¹See Regs. Sec. 1.121-1(b)(4), Example (4).