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

I.  Definition of a Principal Residence

Background

Prop. Reg. §1.121-1(b) provides that whether property is used by the taxpayer as the taxpayer’s residence, or as the taxpayer’s principal residence when the taxpayer uses more than one property as a residence, depends upon all of the facts and circumstances. Where a taxpayer uses more than one property as a residence for successive periods of time, the property used a majority of the time during the year will ordinarily be considered the taxpayer’s principal residence (emphasis added). A principal residence may include a houseboat, a house trailer, or stock held by a tenant-stockholder in a cooperative housing corporation in specific situations.

Prop. Reg. §1.121-1(c) provides that the ownership and use requirements for periods aggregating two years or more may be satisfied by establishing ownership and use for 24 full months or 730 days. Occupancy of the residence is required to meet the use requirement. However, short temporary absences, such as for vacation or seasonal absence, are counted as periods of use, even if the residence is rented out during the absence. Example 4 in Prop. Reg. §1.121-1(f) illustrates that a one-year absence from the home while the owner works abroad is not considered a temporary absence. Example 5 in Prop. Reg. §1.121-1(f) illustrates that a 2-month absence in each of 2 years for summer vacation is a temporary absence such that the 4 months are counted as "use" for determining if the 24 months of use requirement under §121 is met. Example 10 at Prop. Reg. §1.121-1(f) involves a taxpayer who, over a 5-year period, owns and uses 2 residences each year, spending 7 months per year in the New York home and 5 months in the Florida home. Since the taxpayer used the New York home a majority of the time each year, that home is considered the taxpayer’s principal residence and would be the only residence eligible for the §121 gain exclusion unless facts and circumstances indicate otherwise.

Prop. Reg. 1.121-1(e) provides that if a taxpayer satisfies the use requirement only for a portion of the property sold or exchanged, Section 121 only applies to such portion. An example of this would be where a portion of the home is used for business purposes.