Specific Comments on the Proposed Section 121 Regulations
(Reg-105235-99; October 10, 2000)
May 1, 2001

I.  Definition of a Principal Residence

Comments

2. Clarify that Vacant Land Resulting From Destruction of a Principal Residence May Be a Principal Residence

When a principal residence is destroyed, leaving vacant land, an issue arises as to whether that vacant land is still a principal residence to which the tax benefits of Section 121 could apply if the land is sold at a gain.⁵ Revenue Ruling 96-32, 1996-1 C.B. 177, provides that any gain from sale of such remaining land can be treated as an involuntary conversion under Section 1033 if the sale occurs within the period described in Section 1033(a)(2)(B). However, if the owner does not plan to reinvest the sales proceeds, to obtain relief, the owner must apply the facts and circumstances approach of the proposed Section 121 regulations to support a position that the land was a principal residence for 2 of the 5 years preceding the sale date. It would be helpful to state that land remaining after destruction of a principal residence is still a principal residence for Section 121 purposes if the specified time requirements are satisfied.

Recommendation: A safe harbor should be added to Prop. Reg. §1.121-1(e) to allow for exclusion of gain for a portion of a principal residence that was used as an office or rental provided such portion is minor. This exception could be structured as an election under which the individual would forgo depreciation deductions on the office or rental portion of the home. This change would provide further simplification by eliminating the need to compute and track depreciation on the property.