THE TAX COURT DISALLOWS THE EXCLUSION OF THE SALE OF HOME

In a tax court decision [David A. Gates and Christine A Gates, Petitioners v. Commissioner of the IRS, Respondent], held that taxpayers, who voluntarily demolished and constructed a new house on their property in order to enlarge and remodel their home, couldn't exclude the gain on the sale of the new house under the Code Sec. 121 exclusion for the sale of a principal residence. Although the taxpayers owned and used their old house as a principal residence for at least two of the five years before the sale, the Code Sec. 121 exclusion did not apply because they never lived in the new house and it was never used as their principal residence.

The Code Sec. 121 exclusion allows a taxpayer to exclude from income up to $250,000 of gain from the sale of a home owned and used by the taxpayer as a principal residence for at least two of the five years before the sale. The full exclusion does not apply if, within the two-year period ending on the sale date, the exclusion applied to another home sale by the taxpayer. Married taxpayers filing jointly for the year of sale may exclude up to $500,000 of home sale gain if (1) either spouse owned the home for at least two of the five years before the sale, (2) both spouses used the home as a principal residence for at least two of the five years before the sale, and (3) neither spouse is ineligible for the full exclusion because of the once-every-two-year limit.

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