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

V.  Definition of a Principal Residence

Background

Prop. Reg. §1.121-4(b)(1) restates Section 121(d)(3)(A), providing that if an individual holds a residence transferred to that individual incident to divorce, the period that individual owns the property shall include the period the spouse or former spouse owned it.

Prop. Reg. §1.121-4(b)(2) pertains to Section 121(d)(3)(B) providing a special rule for a divorced spouse who moves out of his or her principal residence, but continues to own it (the "out-spouse"). Under this provision, an individual is treated as using property as his or her principal residence during any period of ownership while his or her spouse or former spouse (the "in-spouse") is granted use of the residence under a divorce or separation instrument (as defined in Section 71(b)(2)). Prop. Reg. §1.121-4(b)(2) expands the language of the statute by also stating that the in-spouse must use the property as a principal residence.

Section 1041 provides that no gain or loss shall be recognized on a transfer of property from an individual to a spouse or former spouse if it is incident to divorce. There is no guidance in the statute or in regulations as to how Sections 121 and 1041 are to interact in situations where both provisions appear to apply.