Reference:

Section 121 -- Gains on Residence

Index Nos.: 0057.01-08, 0121.01-00

Full Text:

Refer Reply to: CC:IND:I:3:3

January 8, 1986

LEGEND: * * *
Dear * * *

This is in reply to a letter and enclosures of July 17, 1985, submitted on your behalf by your authorized representative concerning whether gain from the bargain sale of a personal residence may be excluded from income under section 121 of the Internal Revenue Code, and whether such gain is an item of tax preference under section 57 of the Code in the following circumstances.

A and B presently hold their personal residence in joint tenancy. However, B intends to sell the house to Charity individually. Therefore, prior to the sale A will quitclaim A's entire interest in the personal residence to B. B will then sell the home to Charity for less than the fair market value of the property. As consideration for the home, Charity will provide B with an annuity for the remainder of B's life. A and B view the transaction as part sale and part gift to Charity, and B will realize gain on the bargain sale.

At the time of the proposed transaction A and B will both have attained the age of 55 years. During the 5-year period ending on the completion of the sale, the personal residence will have been owned and used by A and B as their personal residence for periods aggregating three years or more. A and B have not previously elected the application of section 121 of the Code to any other sale or exchange.

Section 121(a) of the Code provides that, at the election of the taxpayer, gross income does not include gain from the sale or exchange of property if (l) the taxpayer has attained the age of 55 before such sale or exchange, and (2) during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as his principal residence for periods aggregating three years or more.

Section 55(a) of the Code imposes the alternative minimum tax on the alternative minimum taxable income of noncorporate taxpayers to the extent it produces a higher tax than the taxpayer's regular tax. Alternative minimum taxable income is defined in section 55(b)(1) as adjusted gross income (determined without regard to the net operating loss deduction) reduced by certain amounts and increased by the amount of the taxpayer's items of tax preference.

For noncorporate taxpayers section 57(a)(9)(A) of the Code provides that the net capital gain deduction for the year determined under section 1202 is an item of tax preference. However, section 57(a)(9)(D) provides that for purposes of subparagraph (A), gain from the sale or exchange of a principal residence (within the meaning of section 1034) shall not be taken into account.

After carefully considering the various steps in the proposed transaction, we find that upon the sale neither A nor B will have retained any interest in their personal residence.

Based on the above, we conclude as follows:

1. B may elect to exclude gain from the bargain sale of the personal residence to Charity to the extent provided by section 121 of the Code.

2. Because the property being sold is a principal residence within the meaning of section 1034 of the Code, capital gain realized on the sale of the property will not be taken into account in computing the taxpayer's capital gains item of tax preference under section 57(a)(9)(A), and thus will not result in an increase in the taxpayer's capital gains tax preference item for the taxable year of sale.

Except as specifically ruled upon above, no opinion is expressed as to the federal income tax consequences of the transaction under any other provision of the Code.

this ruling is directed only to the taxpayers who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.

A copy of this letter should be attached to the taxpayer's tax return for the taxable year in which the sale is consummated.

In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your authorized representative.

Sincerely yours,

Richard H. Manfreda
Chief, Individual Income Tax Branch