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

V.  Definition of a Principal Residence

Comments

3. Provide that Section 121 Overrides Section 1041

In some divorce situations where both spouses continue to co-own the residence, the in-spouse would like to purchase the out-spouse’s interest in the home. If Section 1041 applies in this situation though, while the out-spouse has no taxable gain, the in-spouse does not receive an increased basis for the money paid to purchase the out-spouse’s interest.

Recommendation: A provision should be added to Prop. Reg. §1.121-4(b) to state that the Section 121 gain exclusion overrides the Section 1041 gain exclusion to the extent it would operate to exclude gain on sale of a residence between spouses.