Question

Louis owns a condominium in New Orleans which has been his principal residence for 12 years. He wants to be near Lake Ponchartrain since he enjoys water activities. Therefore, he sells the condominium. His original intent was to purchase a house in New Orleans near the lake. However, the cost of such properties far exceeded his sales proceeds. He was able to purchase a house on the lake in Covington, which is located across the causeway. He invested all of his sales proceeds in the Covington house. After two months of commuting over an hour to and from work each day, he decides to rent an efficiency apartment in New Orleans near his office. He spends the weekends and vacations at his home in Covington.

a.

Please explain if Louis qualify for exclusion of gain under § 121

b.

Please explain if his Covington house qualify as his principal residence

Answer 1

Part (a)

(a).In general Section 121 provides that, under certain circumstances, gross income does not include gain realized on the sale or exchange of property that was owned and used by a taxpayer as the taxpayer's principal residence. Subject to the other provisions of section 121, a taxpayer may exclude gain only if, during the 5-year period ending on the date of the sale or exchange, the taxpayer owned and used the property as the taxpayer's principal residence for periods aggregating 2 years or more.

Yes, Louis would qualify for exclusion of gain under Section 121. It is so because; the residence was owned and occupied by Louis for a period of at least during the immediately preceding 5 years on the date of sale. This is as per the provision of Section 121 (a) of IRS. In general

Whether property is used by the taxpayer as the taxpayer's residence depends upon all the facts and circumstances

Part (b)

Defining “Principal Residence”

Virtually all affordable housing programs, including Section 8 and the Low-Income Housing Tax Credit (LIHTC), require that the lessees of the unit use apartments being rented under the applicable program as a “principal residence”. Agencies have not provided a lot of guidance regarding how to define a “principal residence.” A common definition of “principal residence” is the home that a person physically occupies and personally uses the most.

No, Louis's Covington house will not qualify as his principal residence. As per the provision of IRS, a place is classified as the principal residence, where the property is occupied and used by the owner for most of the time. In the given case, the efficiency apartment in New Orleans will be treated as the principal place of residence

Principal residence In the case of a taxpayer using more than one property as a residence, whether property is used by the taxpayer as the taxpayer's principal residence depends upon all the facts and circumstances. If a taxpayer alternates between 2 properties, using each as a residence for successive periods of time, the property that the taxpayer uses a majority of the time during the year ordinarily will be considered the taxpayer's principal residence. In addition to the taxpayer's use of the property, relevant factors in determining a taxpayer's principal residence, include, but are not limited to -

(i) The taxpayer's place of employment;

(ii) The principal place of abode of the taxpayer's family members;

(iii) The address listed on the taxpayer's federal and state tax returns, driver's license, automobile registration, and voter registration card;