Tax Court Decision: Excluding Gain On Sale of Principal Residence

[Alan]

The US Tax Court rendered a decision (see below for link) that includes
a definition of the terms "property" and "principal residence" as it
relates to IRC Sec. 121 exclusion of gain on the sale. Briefly, they
ruled that a couple who elected to demolish a home that would otherwise
have qualified for exclusion, and build a new home on the site of the
old home, was not entitled to exclude gain on the sale because they sold
the home before they ever established it as their principal residence
(they never moved into it). The court determined that the IRC section
was ambiguous because property and principal residence were not defined.
I advise all to read it. Be sure to read the dissenting opinion that
five judges agreed to.

Let's hope that the plaintiffs have the resources to appeal this
decision as it 1. places limits on who qualifies for the exclusion and
2. leaves open some thorny issues relating to homes demolished by
natural disasters.

http://www.ustaxcourt.gov/InOpHistoric/Gates.TC.WPD.pdf

 

[removeps-groups]

Let's hope that the plaintiffs have the resources to appeal this
decision as it 1. places limits on who qualifies for the exclusion and
2. leaves open some thorny issues relating to homes demolished by
natural disasters.

http://www.ustaxcourt.gov/InOpHistoric/Gates.TC.WPD.pdf

How come JJ is both with the concurring and dissenting opinion?

There appear to be 12 or 10 justices (if JJ is not a person). So what
happens when there is a tie-breaker?

Is the next level court the US Court of Appeals?

How long does it normally take for them to determine if they will
listen to arguments? How long do the arguments normally take?

What different arguments will the parties present to the next level
court, if any? Or does the court just re-hear the same facts?

The person in court case is in CA and thus has CA income tax return
issues as well. Ouch.

Maybe they could find that CA statutes define primary home more
liberally, and thus federal law will defer to state law on this issue.

It's an irony to me that the new sec 121 mostly benefits people in the
big expensive cities, but people in those cities are typically more
pro-tax.

 

[Alan]

How come JJ is both with the concurring and dissenting opinion?

JJ is a legal abbreviation. J = Justice. JJ = Justices.

There appear to be 12 or 10 justices (if JJ is not a person). So what
happens when there is a tie-breaker?

Each trial is heard by one judge, who writes the opinion. Each opinion
is reviewed by the Tax Court's Chief Judge. Usually, the opinion is
agreed to and released. However, in certain cases (like this one), the
Chief Judge will designate that the opinion be reviewed by other judges.
Majority rules. There are also unusual times when the Chief will order
the entire Court to hear a case en banc.

Is the next level court the US Court of Appeals?
Yes.


How long does it normally take for them to determine if they will
listen to arguments? How long do the arguments normally take?

I don't know.

What different arguments will the parties present to the next level
court, if any? Or does the court just re-hear the same facts?

I am not an attorney. However, it is my understanding that the Appeals
court only addresses the issues that were raised in the original trial.
Usually, in tax cases, they accept the findings of fact. However, they
can challenge the findings from the trial court.

 

[Alan]

Maybe they could find that CA statutes define primary home more
liberally, and thus federal law will defer to state law on this issue.

No dice.

It's an irony to me that the new sec 121 mostly benefits people in the
big expensive cities, but people in those cities are typically more
pro-tax.

You've lost me on this one on both counts. I've never seen any data
that contains a distributive analysis of the tax benefit that derives
from the exclusion from gross income nor have I seen any survey data
that says residents of big cities are typically more pro-tax.

 

[D. Stussy]

The US Tax Court rendered a decision (see below for link) that includes
a definition of the terms "property" and "principal residence" as it
relates to IRC Sec. 121 exclusion of gain on the sale. Briefly, they
ruled that a couple who elected to demolish a home that would otherwise
have qualified for exclusion, and build a new home on the site of the
old home, was not entitled to exclude gain on the sale because they sold
the home before they ever established it as their principal residence
(they never moved into it). The court determined that the IRC section
was ambiguous because property and principal residence were not defined.
I advise all to read it. Be sure to read the dissenting opinion that
five judges agreed to.

Let's hope that the plaintiffs have the resources to appeal this
decision as it 1. places limits on who qualifies for the exclusion and
2. leaves open some thorny issues relating to homes demolished by
natural disasters.

http://www.ustaxcourt.gov/InOpHistoric/Gates.TC.WPD.pdf

Since the "sale of residence" also includes the land the demolished
residence sat on, I don't see why the land itself didn't qualify even if
the new structure failed to.

Typically, a residence is BOTH the structure and the land it sits on (where
both are under the same title). The only exception I am aware of is for
mobile homes, where one typically owns the structure but rents the land.

 

[Alan]

Since the "sale of residence" also includes the land the demolished
residence sat on, I don't see why the land itself didn't qualify even if
the new structure failed to.

Typically, a residence is BOTH the structure and the land it sits on (where
both are under the same title). The only exception I am aware of is for
mobile homes, where one typically owns the structure but rents the land.

The below excerpt is from a concurring opinion that also argued why the
dissenting justices are wrong.

Petitioners did not argue for a partial exclusion of gain attributable
to the sale of the land, nor did petitioners introduce any evidence that
would have permitted the Court to allocate gain between the new house
and the land. Petitioners argued only that they were entitled to the
full exclusion under section 121. As the majority holds, the property
sold, i.e., the dwelling and related land, must have actually been used
as petitioners’ principal residence for the required 2-year period.
Because the new house petitioners sold was never used as their principal
residence, the section 121 exclusion does not apply here. We may reach a
different conclusion in cases involving different facts if and when the
opportunity arises, but we should not distort the result in this case by
anticipating those cases.

 

[D. Stussy]

The below excerpt is from a concurring opinion that also argued why the
dissenting justices are wrong.

Petitioners did not argue for a partial exclusion of gain attributable
to the sale of the land, nor did petitioners introduce any evidence that
would have permitted the Court to allocate gain between the new house
and the land. Petitioners argued only that they were entitled to the
full exclusion under section 121. As the majority holds, the property
sold, i.e., the dwelling and related land, must have actually been used
as petitioners’ principal residence for the required 2-year period.
Because the new house petitioners sold was never used as their principal
residence, the section 121 exclusion does not apply here. We may reach a
different conclusion in cases involving different facts if and when the
opportunity arises, but we should not distort the result in this case by
anticipating those cases.

OK, so the land by itself might qualify, but the petitioners failed to
bring that question before the Court as a fallback position, so the Court
didn't consider it.

Arguing a fallback position is always dangerous - for in general, it may
weaken the primary position.

 

[Alan]

OK, so the land by itself might qualify, but the petitioners failed to
bring that question before the Court as a fallback position, so the Court
didn't consider it.

Arguing a fallback position is always dangerous - for in general, it may
weaken the primary position.

Unfortunately, the wording in Judge Marvel's opinion would not have
provided any exclusion from income even if Mr. & Mrs. Gates had raised
the question about the land. The court said that unless you sell a
"dwelling" that was used as your principal residence, you fail to
qualify for the Sec. 121 exclusion. The Gates' did not sell their
principal residence as they never moved into the home they built on the
land.

 

[Wallace]

Unfortunately, the wording in Judge Marvel's opinion would not have
provided any exclusion from income even if Mr. & Mrs. Gates had raised the
question about the land. The court said that unless you sell a "dwelling"
that was used as your principal residence, you fail to qualify for the
Sec. 121 exclusion. The Gates' did not sell their principal residence as
they never moved into the home they built on the land.

So, if my residence burns down, and I sell the lot, I fail to qualify for
the Sec. 121 exclusion?

 

[Alan]

So, if my residence burns down, and I sell the lot, I fail to qualify for
the Sec. 121 exclusion?

It's not what the court said. However, it is one of the thorny issues
that is left open by the decision. Here's another example: Your home is
destroyed by a natural disaster. You rebuild and sell before moving in.

 

[D. Stussy]

It's not what the court said. However, it is one of the thorny issues
that is left open by the decision. Here's another example: Your home is
destroyed by a natural disaster. You rebuild and sell before moving in.

....Which the IRS has generally said qualifies, even for a partial exclusion
as an "unforseeen circumstance."

Therefore, in my opinion, the Court's ruling has made matters regarding
this type of issue much more complicated.

 

[Alan]

...Which the IRS has generally said qualifies, even for a partial exclusion
as an "unforseeen circumstance."

True, but not with the same set of facts. I.e., you rebuild the home and
sell it without using it as your primary residence.

Therefore, in my opinion, the Court's ruling has made matters regarding
this type of issue much more complicated.

True... which is why I posted the case.

 

[Route101]

True, but not with the same set of facts. I.e., you rebuild the home and
sell it without using it as your primary residence.

True... which is why I posted the case.

Under this ruling, would loss of a non-primary residence, therefore, be
eligible for a loss on Schedule D? IOW, if they had not built a replacement
house on the property and just sold the the remaining land, would they be
able to claim the net difference as a capital loss because it is not a main
home?


.......................................................................................
"The center of the universe always is someplace else."

 

[Seth]

Under this ruling, would loss of a non-primary residence, therefore, be
eligible for a loss on Schedule D? IOW, if they had not built a replacement
house on the property and just sold the the remaining land, would they be
able to claim the net difference as a capital loss because it is not a main
home?

For capital loss deductions, the issue isn't whether it's a "main
home", but whether the purpose of the purchase is business or
personal. For any sort of residence (other than something clearly
intended as rental property), the purpose appears to be personal,
hence losses are non-deductible.

Seth

 

[D. Stussy]

Under this ruling, would loss of a non-primary residence, therefore, be
eligible for a loss on Schedule D? IOW, if they had not built a replacement
house on the property and just sold the the remaining land, would they be
able to claim the net difference as a capital loss because it is not a main
home?

No, because personal losses are not deductible.

Depending on how it was lost, it may be a casualty loss - which could then
make the sale a gain.


========================================= MODERATOR'S COMMENT:
Please trim excess text in future postings.

 

[Seth]

Under this ruling, would loss of a non-primary residence, therefore, be
eligible for a loss on Schedule D? IOW, if they had not built a replacement
house on the property and just sold the the remaining land, would they be
able to claim the net difference as a capital loss because it is not a main
home?

No, because personal losses are not deductible.

Depending on how it was lost, it may be a casualty loss - which could then
make the sale a gain.[/QUOTE]

An interesting issue arises: Suppose a house is destroyed by a tornado
(loss of value = $200,000, based on comparing prices of similar houses
with empty lots). That's a $200,000 casualty loss, right?

Suppose the owner's income is sufficiently high that the casualty loss
is entirely lost; it has no effect on his taxes.

The land + house that he originally bought for $300,000 is now land
that he sold for $200,000. Does he really have a taxable gain of
$100,000?

Seth