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

I.  Definition of a Principal Residence

Comments

6. Treatment of De Minimis Rental or Office in the Home as Use of a Residence

As described by the legislative history of the Taxpayer Relief Act of 1997, the primary reason for changing the treatment of gain from sale or exchange of a principal residence was to simplify tax compliance by eliminating the need to maintain records to substantiate the basis of a principal residence.⁶ Under prior law, "detailed records of transactions and expenditures on home improvements must be kept, in most cases, for many decades."

However, even minimal use of a residence for rental or home office purposes necessitates the maintenance of records on basis and improvements. The complications such recordkeeping involves can be an accounting nightmare, particularly where only a relatively small percentage of the property is not used as a principal residence. For example, a home office might be a 12' x 12' room in a 2,400-square foot house, which is only 6 percent of the total area.

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.