60136 Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules

Dated: September 27, 2000.

George C. Lannon,

Acting Assistant Secretary for Consular

Affairs, U.S. Department of State.

[FR Doc. 00–25782 Filed 10–6–00; 8:45 am]

BILLING CODE 4710–06–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–105235–99]

RIN 1545–AX28

Exclusion of Gain From Sale or

Exchange of a Principal Residence

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations relating to the

exclusion of gain from the sale or

exchange of a taxpayer’s principal

residence. These proposed regulations

reflect changes to the law made by the

Taxpayer Relief Act of 1997, as

amended by the Internal Revenue

Service Restructuring and Reform Act of

1998. These proposed regulations

generally affect taxpayers who sell or

exchange their principal residences.

DATES: Written or electronically

generated comments must be received

by January 8, 2001. Requests to speak

(with outlines of oral comments) to be

discussed at the public hearing

scheduled for January 23, 2001 at 10

a.m., must be submitted by January 3,

2001.

ADDRESSES: Send submissions to:

CC:M&SP:RU (REG–105235–99), room

5226, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. Submissions may be hand

delivered between the hours of 8 a.m.

and 5 p.m. to: CC:M&SP:RU (REG–

105235–99), Courier’s Desk, Internal

Revenue Service, 1111 Constitution

Ave., NW., Washington, DC.

Alternatively, taxpayers may submit

comments electronically via the Internet

by selecting the ‘‘Tax Regs’’ option on

the IRS Home Page, or by submitting

comments directly to the IRS internet

site at http://www.irs.gov/tax_regs/

regslist.html. The public hearing will be

held in the IRS Auditorium, Seventh

Floor, Internal Revenue Service

Building, 1111 Constitution Avenue,

NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Sara P.

Shepherd, (202) 622–4910; concerning

submissions of comments, the hearing,

and/or to be placed on the building

access list to attend the hearing, contact

Treena Garrett, (202) 622–7180 (not tollfree numbers).

SUPPLEMENTARY INFORMATION:

Background

1. Section 121 Exclusion

This document contains proposed

amendments to the Income Tax

Regulations (26 CFR part 1) under

section 121 of the Internal Revenue

Code relating to the exclusion of gain

from the sale or exchange of a taxpayer’s

principal residence. These proposed

regulations reflect changes to the law

made by the Taxpayer Relief Act of

1997, Public Law 105–34 (111 Stat. 788

(TRA 1997)), as amended by the Internal

Revenue Service Restructuring and

Reform Act of 1998, Public Law 105–

206 (112 Stat. 805 (RRA 1998)).

Prior to the repeal by TRA 1997,

section 1034 provided that gain from the

sale or exchange of a principal residence

(old residence) was recognized only to

the extent that the taxpayer’s adjusted

sales price of the old residence

exceeded the taxpayer’s cost of

purchasing a new residence within the

replacement period (generally 2 years

before or after the date of sale).

Prior to amendment by TRA 1997,

former section 121 provided that a

taxpayer could make a one-time election

to exclude up to $125,000 of gain from

the sale or exchange of property. To

qualify for the exclusion, the taxpayer

must have: (1) Been age 55 or older on

the date of the sale or exchange; and (2)

owned and used the property as the

taxpayer’s principal residence for at

least 3 years during the 5-year period

ending on the date of the sale or

exchange.

TRA 1997 amended section 121 and

repealed section 1034 for sales and

exchanges of principal residences after

May 6, 1997 (except, at the election of

the taxpayer, to a sale or exchange: (1)

Made on or before August 5, 1997; (2)

made pursuant to a binding contract in

effect on August 5, 1997; or (3) that

would qualify under section 1034 by

reason of a new residence acquired on

or before August 5, 1997 or pursuant to

a binding contract in effect on August 5,

1997). Under section 121 as amended, a

taxpayer generally excludes up to

$250,000 ($500,000 for certain joint

returns) of gain realized on the sale or

exchange of property if the property was

owned and used as the taxpayer’s

principal residence for at least 2 years

during the 5-year period ending on the

date of the sale or exchange. The

exclusion applies regardless of the age

of the taxpayer, and the full exclusion

can be used only once every 2 years. A

taxpayer who fails to meet these

requirements by reason of a change in

place of employment, health, or, to the

extent provided in regulations,

unforeseen circumstances may be

entitled to a reduced exclusion.

RRA 1998 amended TRA 1997 to

clarify that the reduced exclusion

amount under section 121(c) is a portion

of the maximum limitation amount

($250,000 or $500,000 for certain joint

returns), not a portion of the realized

gain. See H.R. Rep. No. 356, 105th

Cong., 1st Sess. 17 (1997); S. Rep. No.

174, 105th Cong., 2d Sess. 150 (1998).

In addition, the amendments provided

that for married taxpayers filing jointly

but failing to meet the ownership, use,

or timing requirements of section

121(b)(2)(A), the maximum limitation

amount will be the sum of each spouse’s

limitation amount determined on a

separate basis as if they had not been

married. S. Rep. No. 174, 105th Cong.,

2d Sess. 151 (1998); H.R. Conf. Rep. No.

599, 105th Cong., 2d Sess. 337 (1998).

Lastly, the amendments clarified that a

taxpayer may elect to apply prior law

under section 1034 or former section

121 to a sale or exchange occurring on

as well as before the date of enactment,

August 5, 1997. H.R. Rep. No. 356,

105th Cong., 1st Sess. 18 (1997); S. Rep.

No. 174, 105th Cong., 2d Sess. 151

(1998).

2. Section 121 Exclusion in

Individuals’ Title 11 Cases

This document also contains

proposed amendments to the Income

Taxation Regulations (26 CFR part 1)

under section 1398 of the Internal

Revenue Code. Under the authority

provided in section 1398(g)(8), the

regulations add the section 121

exclusion to the list of tax attributes of

the debtor that the bankruptcy estate of

an individual in a chapter 7 or 11

bankruptcy case under title 11 of the

United States Code succeeds to and

takes into account in computing the

taxable income of the estate. Although

these regulations are proposed to be

applicable on or after the date they are

published as final regulations in the

Federal Register, in view of the IRS’s

acquiescence in the case of Internal

Revenue Service v. Waldschmidt (In re

Bradley), AOD CC–1999–009 (August

30, 1999), and Chief Counsel Notice

(35)000–162 (August 10, 1999), the IRS

will not challenge the position taken

prior to the effective date of these

regulations that a bankruptcy estate may

use the section 121 exclusion if the

Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules 60137

debtor would otherwise satisfy the

section 121 requirements.

Explanation of Provisions

1. Section 121 Exclusion

Section 1.121–1(b) of the proposed

regulations addresses the definition of

principal residence. This section

provides that whether or not property is

the taxpayer’s principal residence, and

whether or not property is used by the

taxpayer as the taxpayer’s principal

residence (in the case of a taxpayer

using more than one property as a

residence), depends upon all the facts

and circumstances. If a taxpayer

alternates between two properties, using

each as a residence for successive

periods of time, the property that the

taxpayer uses a majority of the time

during the year will ordinarily be

considered the taxpayer’s principal

residence.

Section 1.121–1(c) of the proposed

regulations addresses the use

requirement under section 121(a). This

section provides that, in order for a

taxpayer to satisfy the use requirement

under section 121(a), the taxpayer must

occupy the residence (except for short

temporary absences) for at least 2 years

during the 5-year period ending on the

date of the sale or exchange. See H.R.

Rep. No. 148, 105th Cong., 1st Sess. at

348 (1997); S. Rep. No. 33, 105th Cong.,

1st Sess. at 37 (1997); H.R. Conf. Rep.

No. 220, 105th Cong., 1st Sess. at 386

(1997).

Section 1.121–1(d) provides that the

section 121 exclusion does not apply to

so much of the gain from the sale or

exchange of property as does not exceed

the portion of the depreciation

adjustments (as defined in section

1250(b)(3)) attributable to periods after

May 6, 1997, in respect of the property.

Section 1.121–1(e) of the proposed

regulations provides that if a taxpayer

satisfies the use requirement only with

respect to a portion of the property sold

or exchanged, section 121 will apply

only to the gain from the sale or

exchange allocable to that portion.

Thus, if the residence was used partially

for residential purposes and partially for

business purposes, only that part of the

gain allocable to the residential portion

is excludable under section 121.

Furthermore, the section 121 exclusion

does not apply to the extent that

depreciation attributable to periods after

May 6, 1997, exceeds gain allocable to

the business-use portion of the property.

Under section 121(c), a reduced

exclusion is available for a taxpayer

who sells or exchanges property used as

the taxpayer’s principal residence but

fails to satisfy the ownership and use

requirements described in section 121(a)

or the 2-year limitation described in

section 121(b)(3). Section 1.121–3(a)(1)

of the proposed regulations provides

that the reduced exclusion applies only

if the sale or exchange is necessitated by

a change in place of employment,

health, or, to the extent provided in

forms, instructions, or other appropriate

guidance including regulations and

letter rulings, unforeseen circumstances.

The IRS and the Treasury Department

request written comments regarding

what should qualify as an unforeseen

circumstance for purposes of

determining whether a taxpayer is

eligible to claim the reduced exclusion

available under section 121(c).

Under section 121(d)(8), a taxpayer

must make an election to have the

section 121 exclusion apply to a sale or

exchange of a remainder interest in the

taxpayer’s principal residence. Section

1.121–4(f)(3) provides that the taxpayer

makes the election by filing a return for

the taxable year of the sale or exchange

that does not include the gain from the

sale or exchange of the remainder

interest in the taxpayer’s gross income.

Under section 121(f), a taxpayer must

make an election to have the section 121

exclusion not apply to a sale or

exchange of the taxpayer’s principal

residence. Section 1.121–4(h) provides

that the taxpayer makes the election by

filing a return for the taxable year of the

sale or exchange that includes the gain

from the sale or exchange of the

residence in the taxpayer’s gross

income.

2. Section 121 Exclusion in

Individuals’ Title 11 Cases

Section 1.1398–3 of the proposed

regulations provides that the bankruptcy

estate of an individual in a chapter 7 or

11 bankruptcy case under title 11 of the

United States Code succeeds to and

takes into account the debtor’s section

121 exclusion if the taxpayer satisfies

the requirements of section 121.

3. Proposed Effective Date

These regulations are proposed to be

applicable for sales or exchanges that

occur on or after the date they are

published as final regulations in the

Federal Register.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in Executive Order 12866. Therefore, a

regulatory assessment is not required. It

also has been determined that section

553(b) of the Administrative Procedure

Act (5 U.S.C. chapter 5) does not apply

to these regulations, and because these

regulations do not impose a collection

of information on small entities, the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed

rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Comments and Requests for a Public

Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

electronic or written comments (a

signed original and eight (8) copies of

written comments) that are submitted

timely (in the manner described in the

ADDRESSES caption) to the IRS. The IRS

and Treasury request comments on the

clarity of the proposed rules and how

they may be made easier to understand.

All comments will be available for

public inspection and copying.

A public hearing has been scheduled

for January 23, 2001, beginning at 10

a.m. in the IRS Auditorium, Seventh

Floor, Internal Revenue Building, 1111

Constitution Avenue, NW., Washington,

DC. Due to building security

procedures, visitors must enter at the

10th Street entrance, located between

Constitution and Pennsylvania

Avenues, NW. In addition, all visitors

must present photo identification to

enter the building. Because of access

restrictions, visitors will not be

admitted beyond the immediate

entrance area more than 15 minutes

before the hearing starts. For

information about having your name

placed on the building access list to

attend the hearing, see the FOR FURTHER

INFORMATION CONTACT section of the

preamble.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing. Persons who wish

to present oral comments at the hearing

must submit written comments and an

outline of the topics to be discussed and

the time to be devoted to each topic

(signed original and eight (8) copies) by

January 3, 2001. A period of 10 minutes

will be allotted to each person making

comments. An agenda showing the

scheduling of the speakers will be

prepared after the deadline for receiving

outlines has passed. Copies of the

agenda will be available free of charge

at the hearing.

Drafting Information

The principal author of these

regulations is Sara P. Shepherd, Office

of Assistant Chief Counsel (Income Tax

and Accounting). However, other

personnel from the IRS and the Treasury

60138 Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules

Department participated in the

development of the regulations.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 is amended by adding an entry

in numerical order to read in part as

follows:

Authority: 26 U.S.C. 7805. * * * Section

1.1398–3 also issued under 26 U.S.C. 1398(g).

Par. 2. Sections 1.121–1, 1.121–2,

1.121–3 and 1.121–4 are revised to read

as follows:

§ 1.121–1 Exclusion of gain from sale or

exchange of a principal residence.

(a) In general. Section 121 provides

that, under certain circumstances, gross

income does not include gain realized

on the sale or exchange of property that

was owned and used by a taxpayer as

the taxpayer’s principal residence.

Subject to the other provisions of

section 121, a taxpayer will exclude

gain only if, during the 5-year period

ending on the date of the sale or

exchange, the taxpayer owned and used

the property as the taxpayer’s principal

residence for periods aggregating 2 years

or more.

(b) Principal residence. Whether or

not property is used by the taxpayer as

the taxpayer’s residence, and whether or

not property is used by the taxpayer as

the taxpayer’s principal residence (in

the case of a taxpayer using more than

one property as a residence), depends

upon all the facts and circumstances. If

a taxpayer alternates between two

properties, using each as a residence for

successive periods of time, the property

that the taxpayer uses a majority of the

time during the year will ordinarily be

considered the taxpayer’s principal

residence. A property used by the

taxpayer as the taxpayer’s principal

residence may include a houseboat, a

house trailer, or stock held by a tenantstockholder in a cooperative housing

corporation (as those terms are defined

in section 216(b)(1) and (2)), if the

dwelling that the taxpayer is entitled to

occupy as a stockholder is used by the

taxpayer as the taxpayer’s principal

residence. Property used by the taxpayer

as the taxpayer’s principal residence

does not include personal property, that

is not a fixture under local law.

(c) Ownership and use requirements.

The requirements of ownership and use

for periods aggregating 2 years or more

may be satisfied by establishing

ownership and use for 24 full months or

for 730 days (365 × 2). The requirements

of ownership and use may be satisfied

during nonconcurrent periods if both

the ownership and use tests are met

during the 5-year period ending on the

date of the sale or exchange. In

establishing whether a taxpayer has

satisfied the 2-year use requirement,

occupancy of the residence is required.

However, short temporary absences,

such as for vacation or other seasonal

absence (although accompanied with

rental of the residence), are counted as

periods of use.

(d) Depreciation taken after May 6,

1997. The section 121 exclusion does

not apply to so much of the gain from

the sale or exchange of property as does

not exceed the portion of the

depreciation adjustments (as defined in

section 1250(b)(3)) attributable to

periods after May 6, 1997, in respect of

the property.

(e) Property used in part as a

principal residence. If a taxpayer

satisfies the use requirement only with

respect to a portion of the property sold

or exchanged, section 121 will apply

only to the gain from the sale or

exchange allocable to that portion.

Thus, if the residence was used partially

for residential purposes and partially for

business purposes, only that part of the

gain allocable to the residential portion

is excludable under section 121.

Furthermore, the section 121 exclusion

does not apply to the extent that

depreciation attributable to periods after

May 6, 1997, exceeds gain allocable to

the business-use portion of the property.

See Example 8 in paragraph (f) of this

section.

(f) Examples. The provisions of

paragraphs (a) through (e) of this section

are illustrated by the following

examples:

Example 1. Taxpayer A has owned and

used his house as his principal residence

since 1986. On January 1, 1998, A moves to

another state. A leases his house from that

date until April 18, 2000, when he sells it.

A is eligible for the section 121 exclusion

because he has owned and used the house as

his principal residence for at least 2 years out

of the 5 years preceding the sale.

Example 2. Taxpayer B owned and used a

house as her principal residence from 1986

to the end of 1997. On January 1, 1998, B

moved to another state and ceases to use the

house. B’s move was not necessitated by a

change in place of employment, health, or

unforeseen circumstances. B’s son moved

into the house in March 1999 and used the

residence until it was sold on July 1, 2001.

Taxpayer B may not exclude gain from the

sale under section 121 because she did not

use the property as her principal residence

for at least 2 years out of the 5 years

preceding the sale.

Example 3. Taxpayer C lived in a

townhouse that he rented from 1993 through

1997. On January 1, 1998, he purchased this

townhouse. On February 1, 1998, C moved

into his daughter’s home. On March 1, 2000,

while still living in his daughter’s home, C

sold his townhouse. The section 121

exclusion will apply to gain from the sale

because C owned the townhouse for at least

2 years out of the 5 years preceding the sale

(from January 1, 1998 until March 1, 2000)

and he used the townhouse as his principal

residence for at least 2 years during the 5-

year period preceding the sale (from March

1, 1995 until February 1, 1998).

Example 4. Taxpayer D, a college

professor, purchased and moved into a house

on May 1, 1997. He used the house as his

principal residence continuously until

September 1, 1998, when he went abroad for

a 1-year sabbatical leave. On October 1, 1999,

1 month after returning from the leave, D

sold the house. Because his leave is not

considered to be a short temporary absence

for purposes of section 121 (see paragraph (c)

of this section), the period of the leave may

not be included in determining whether D

used the house for periods aggregating 2

years during the 5-year period ending on the

date of the sale. Consequently, D is not

entitled to exclude gain under section 121

because he did not use the residence for the

requisite period.

Example 5. Taxpayer E purchased a house

on February 1, 1998, that he used as his

principal residence. During 1998 and 1999, E

left his residence for a 2-month summer

vacation. E sold the house on March 1, 2000.

Although, in the 5-year period preceding the

date of sale, the total time E used his

residence is less than 2 years (21 months),

the section 121 exclusion will apply to gain

from the sale of the residence because the 2-

month vacations are short temporary

absences and are counted as periods of use

in determining whether E used the residence

for the requisite period.

Example 6. On July 1, 1999, Taxpayer F

moves into a house that he owns and had

rented to tenants since July 1, 1997. F took

depreciation deductions totaling $14,000 for

the period that he rented the property. After

using the residence as his principal residence

for 2 full years, F sells the property on

August 1, 2001. F’s gain realized from the

sale is $40,000. F had no capital losses for

2001. Only $26,000 ($40,000 gain realized—

$14,000 depreciation deductions) may be

excluded under section 121. The $14,000 of

gain recognized by F is unrecaptured section

1250 gain within the meaning of section 1(h).

Example 7. Taxpayer G, an attorney, uses

a portion of her principal residence as a law

office for a period in excess of 3 years out

of the 5 years preceding the sale of the

property. Because G did not use the law

office portion of the property as her

residence, the section 121 exclusion does not

apply to the gain from the sale that is

allocable to the law office portion of the

property.

Example 8. Taxpayer H buys a house in

1998. For 5 years, H uses a portion of the

property as his principal residence and a

Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules 60139

portion of the property for business purposes.

H claims depreciation deductions of $20,000

for the business use of the property. H sells

the property in 2003, realizing a gain of

$50,000. H had no other section 1231 or

capital gains or losses for 2003. H determines

that $15,000 of the gain is allocable to the

business-use portion of the property and that

$35,000 of the gain is allocable to the portion

of the property used as his residence. H must

recognize $15,000 of the gain allocable to the

business-use portion of the property. This

$15,000 of gain is unrecaptured section 1250

gain within the meaning of section 1(h). In

addition, the section 121 exclusion does not

apply to the extent that H’s post-May 6, 1997

depreciation ($20,000) exceeds the gain

allocable to the business-use portion of the

property ($15,000). Therefore, H may exclude

$30,000 of the gain from the sale of the

property. The remaining $5,000 of gain is

recognized by H as unrecaptured section

1250 gain within the meaning of section 1(h).

Example 9. Taxpayer J buys a house in

1998. For 5 years, J uses a portion of the

property as her principal residence and a

portion of the property for business purposes.

J claims depreciation deductions of $10,000

for the business use of the property. J sells

the property in 2003, realizing a gain of

$50,000. J had no other section 1231 or

capital gains or losses for 2003. J determines

that $15,000 of the gain is allocable to the

business-use portion of the property and that

$35,000 of the gain is allocable to the portion

of the property used as her residence. J must

recognize the $15,000 of gain allocable to the

business-use portion of the property ($10,000

of which is unrecaptured section 1250 gain

within the meaning of section 1(h), and

$5,000 of which adjusted net capital gain). J

may exclude $35,000 of the gain from the

sale of the property.

Example 10. Taxpayer K owns two

residences, one in New York and one in

Florida. From 1999 through 2003, K lives in

the New York residence for 7 months and the

Florida residence for 5 months. Thus, K used

the New York residence a majority of the

time in each year from 1999 through 2003.

Therefore, in the absence of facts and

circumstances indicating otherwise, the New

York residence is K’s principal residence,

and only the New York residence would be

eligible for the 121 exclusion if it were sold

at the end of 2003.

Example 11. Taxpayer L owns two

residences, one in Virginia and one in Maine.

During 1999 and 2000, L lives in the Virginia

residence. During 2001 and 2002, L lives in

the Maine residence. During 2003, L lives in

the Virginia residence. L’s principal

residence during 1999, 2000, and 2003 is the

Virginia residence. L’s principal residence

during 2001 and 2002 is the Maine residence.

Either residence would be eligible for the 121

exclusion if it were sold during 2003.

(g) Effective date. This section and

§§ 1.121–2 through 1.121–4 are

applicable for sales and exchanges that

occur on or after the date these

regulations are published as final

regulations in the Federal Register.

§ 1.121–2 Limitations.

(a) Dollar limitations. A taxpayer may

exclude from gross income up to

$250,000 of gain from the sale or

exchange of the taxpayer’s principal

residence. If taxpayers jointly own a

principal residence but file separate

returns, each taxpayer will exclude from

gross income up to $250,000 of gain that

is attributable to each taxpayer’s interest

in the property, if the requirements of

section 121 have otherwise been met.

(b) Special rules for joint returns—(1)

In general. A husband and wife who

make a joint return for the year of the

sale or exchange may exclude up to

$500,000 of gain if—

(i) Either spouse meets the 2-year

ownership requirements of

§ 1.121–1(a);

(ii) Both spouses meet the 2-year use

requirements of § 1.121–1(a); and

(iii) Neither spouse excluded gain

from a prior sale or exchange of

property under section 121 within the

last 2 years (as determined under

paragraph (c) of this section).

(2) Other joint returns. For taxpayers

filing jointly, if the spouses fail to meet

the requirements of paragraph (b)(1) of

this section, the maximum limitation

amount to be claimed by the couple will

be the sum of each spouse’s limitation

amount determined on a separate basis

as if they had not been married.

For this purpose, each spouse will be

treated as owning the property during

the period that either spouse owned the

property.

(3) Examples. The provisions of this

paragraph (b) are illustrated by the

following examples:

Example 1. Married taxpayers H and W sell

their residence and the gain realized from the

sale is $256,000. A and B meet the

requirements of section 121 and file a joint

return for the year of the sale. The entire

amount of gain from the sale of their

principal residence is excluded from gross

income because the gain realized from the

sale does not exceed the limitation amount

of $500,000 available to taxpayers filing a

joint return.

Example 2. During 1999, married taxpayers

H and W each sell a residence that each had

separately owned and used as a principal

residence before their marriage. Each spouse

meets the ownership and use tests for his or

her respective residence. Neither spouse

meets the use requirement for the other

spouse’s residence. H and W file a joint

return for the year of the sales. The gain

realized from the sale of H’s residence is

$200,000. The gain realized from the sale of

W’s residence is $300,000. Because the

ownership and use requirements are met for

each residence by each respective spouse, H

and W are eligible to exclude up to $250,000

of gain from the sale of each of their

residences. However, W may not use H’s

unused exclusion to exclude gain in excess

of her exclusion amount. Therefore, H and W

must recognize $50,000 of the gain realized

on the sale of W’s residence.

Example 3. Married taxpayers H and W sell

their residence and file a joint return for the

year of the sale. Section 1.121–3 (relating to

the reduced exclusion) does not apply to the

sale of their residence. W, but not H, satisfies

the requirements of section 121. They are

eligible to exclude up to $250,000 of the gain

from the sale of the residence because that is

the sum of each spouse’s dollar limitation

amount determined on a separate basis as if

they had not been married ($0 for H,

$250,000 for W).

Example 4. Married taxpayers H and W

have owned and used their principal

residence since 1998. On February 16, 2001,

H dies. On September 21, 2001, W sells the

residence and realizes a gain of $350,000.

Pursuant to section 6013(a)(3), W and H’s

executor make a joint return for 2001. All

$350,000 may be excluded.

Example 5. Assume the same facts as

Example 4 except that W does not sell the

residence until January 15, 2002. Because

W’s filing status for the taxable year of the

sale is single, the special rules for joint

returns under paragraph (b) of this section do

not apply and W may exclude only $250,000

of the gain.

(c) Application of section 121 to only

1 sale or exchange every 2 years—(1) In

general. Except as otherwise provided

in § 1.121–3 (relating to the reduced

exclusion), a taxpayer may not exclude

from gross income gain from the sale or

exchange of a principal residence if,

during the 2-year period ending on the

date of the sale or exchange, the

taxpayer sold or exchanged other

property for which gain was excluded

under section 121. For purposes of this

paragraph (c)(1), any sale or exchange

before May 7, 1997 is disregarded.

(2) Example. The following example

illustrates the rules of this paragraph (c):

Example. Taxpayer A owned a townhouse

that he used as his principal residence for

two full years, 1998 and 1999. A then bought

a house in 2000 that he owned and used as

his principal residence. A sells the

townhouse in 2002 and excludes gain

realized on its sale under section 121. A sells

the house in the next year, 2003. Section

1.121–3 (relating to the reduced exclusion)

does not apply to the sale of the house.

Although A meets the 2-year ownership and

use requirements of section 121, A is not

eligible to exclude gain from the sale of the

house because A excluded gain within the

last 2 years under section 121 from the sale

of the townhouse.

§ 1.121–3 Reduced exclusion.

(a) Reduced exclusion for taxpayers

failing to meet certain requirements; in

general. A reduced exclusion is

available for a taxpayer who sells or

exchanges property used as the

taxpayer’s principal residence but fails

to satisfy the ownership and use

requirements described in § 1.121–1(a)

60140 Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules

or the 2-year limitation described in

§ 1.121–2(c). This reduced exclusion

applies only if the sale or exchange is

necessitated by a change in place of

employment, health, or, to the extent

provided in forms, instructions, or other

appropriate guidance including

regulations and letter rulings,

unforeseen circumstances. The reduced

exclusion is computed by multiplying

the maximum dollar limitation of

$250,000 ($500,000 for certain joint

filers) by a fraction. The numerator of

the fraction is the shortest of the period

of time that the taxpayer owned the

property as the taxpayer’s principal

residence during the 5-year period

ending on the date of the sale or

exchange; the period of time that the

taxpayer used the property during the 5-

year period ending on the date of the

sale or exchange; or the period of time

between the date of a prior sale or

exchange of property for which the

taxpayer excluded gain under section

121 and the date of the current sale or

exchange. The numerator of the fraction

may be expressed in days or months.

The denominator of the fraction is 730

days or 24 months (depending on the

measure of time used in the numerator).

(b) Examples. The following examples

illustrate the rules of this section:

Example 1. Taxpayer A purchases a house

that she uses as her principal residence.

Twelve months after the purchase, A sells the

house due to a change in place of her

employment. A has not excluded gain under

section 121 on a prior sale or exchange of

property within the last 2 years. A is eligible

to exclude up to $125,000 of the gain from

the sale of her house (12⁄24 × $250,000).

Example 2. (i) Taxpayer H owned a house

that he used as his principal residence since

1996. On January 15, 1999, H and W marry

and W begins to use H’s house as her

principal residence. On January 15, 2000, H

sells the house due to a change in H’s and

W’s place of employment. Neither H nor W

has excluded gain under section 121 on a

prior sale or exchange of property within the

last 2 years.

(ii) Because H and W have not both used

the house as their principal residence for at

least 2 years during the 5-year period

preceding its sale, the maximum dollar

limitation amount that may be claimed by H

and W will not be $500,000, but the sum of

each spouse’s limitation amount determined

on a separate basis as if they had not been

married. (See § 1.121–2(b)(2).)

(iii) H is eligible to exclude up to $250,000

of gain because he meets the requirements of

section 121. W is not eligible to exclude the

maximum dollar limitation amount. Instead,

W is eligible to claim a reduced exclusion.

Because the sale of the house is due to a

change in place of employment, W is eligible

to exclude up to $125,000 of the gain (365/

730 × $250,000). Therefore, H and W are

eligible to exclude up to $375,000 of gain

($250,000 ∂ $125,000) from the sale of the

house.

§ 1.121–4 Special rules.

(a) Property of deceased spouse—(1)

In general. For purposes of satisfying

the ownership and use requirements of

section 121, a taxpayer is treated as

owning and using property as the

taxpayer’s principal residence during

any period that the taxpayer’s deceased

spouse owned and used the property as

a principal residence before death if—

(i) The taxpayer’s spouse is deceased

on the date of the sale or exchange of

the property; and

(ii) The taxpayer has not remarried at

the time of the sale or exchange of the

property.

(2) Example. The provisions of this

paragraph (a) are illustrated by the

following example:

Example. Taxpayer H has owned and used

a house as his principal residence since

January 1, 1987. H and W marry on January

1, 1999 and from that date they use H’s house

as their principal residence. H dies on

January 15, 2000, and W inherits the property

and continues to use the property as her

principal residence. W sells the property on

August 31, 2000, at which time she has not

remarried. Although W has owned and used

the house for less than 2 years, W will be

considered to have satisfied the ownership

and use requirements of section 121 because

W’s period of ownership and use includes

the period that H owned and used the

property before death.

(b) Property owned by spouse or

former spouse—(1) Property transferred

to individual from spouse or former

spouse. If a taxpayer obtains property

from a spouse or former spouse in a

transaction described in section 1041(a),

the period that the taxpayer owns the

property will include the period that the

spouse or former spouse owned the

property.

(2) Property used by spouse or former

spouse. A taxpayer is treated as using

property as the taxpayer’s principal

residence for any period that the

taxpayer has an ownership interest in

the property and the taxpayer’s spouse

or former spouse is granted use of the

property under a divorce or separation

instrument (as defined in section

71(b)(2)), provided that the spouse or

former spouse uses the property as a

principal residence.

(c) Tenant-stockholder in cooperative

housing corporation. A taxpayer who

holds stock as a tenant-stockholder in a

cooperative housing corporation (as

those terms are defined in section

216(b)(1) and (2)) may be eligible to

exclude gain under section 121 on the

sale or exchange of the stock. In

determining whether the taxpayer meets

the requirements of section 121, the

ownership requirements are applied to

the holding of the stock and the use

requirements are applied to the house or

apartment that the taxpayer was entitled

to occupy by reason of the taxpayer’s

stock ownership.

(d) Involuntary conversions—(1) In

general. For purposes of section 121, the

destruction, theft, seizure, requisition,

or condemnation of property is treated

as a sale of the property.

(2) Application of section 1033. In

applying section 1033 (relating to

involuntary conversions), the amount

realized from the sale or exchange of

property used as the taxpayer’s

principal residence is treated as being

the amount determined without regard

to section 121, reduced by the amount

of gain excluded from the taxpayer’s

gross income under section 121.

(3) Property acquired after

involuntary conversion. If the basis of

the property acquired as a result of an

involuntary conversion is determined

(in whole or in part) under section

1033(b) (relating to the basis of property

acquired through involuntary

conversion), then for purposes of

satisfying the requirements of section

121, the taxpayer will be treated as

owning and using the acquired property

as the taxpayer’s principal residence

during any period of time that the

taxpayer owned and used the converted

property as the taxpayer’s principal

residence.

(4) Example. The provisions of this

paragraph (d) are illustrated by the

following example:

Example. (i) On February 18, 1999, fire

destroys Taxpayer A’s house that had an

adjusted basis of $80,000. A had owned and

used this property as her principal residence

for 20 years prior to its destruction. A’s

insurance company paid A $400,000 for the

house. Thus, A realized a gain of $320,000

($400,000 ¥ $80,000). On August 27, 1999,

A purchases a new house at a cost of

$100,000.

(ii) Because the destruction of the house is

treated as a sale for purposes of section 121,

A will exclude $250,000 of the realized gain

from A’s gross income. For purposes of

section 1033, the amount realized is then

treated as being $150,000

($400,000¥$250,000) and the gain realized is

$70,000 ($150,000 amount realized¥$80,000

basis). A elects under section 1033 to

recognize only $50,000 of the gain ($150,000

amount realized¥$100,000 cost of new

house). The remaining $20,000 of gain is

deferred and A’s basis in the new house is

$80,000 ($100,000 cost¥$20,000 gain not

recognized).

(iii) A will be treated as owning and using

the new house as A’s principal residence

during the 20-year period that A owned and

used the destroyed house.

Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules 60141

(e) Determination of use during

periods of out-of-residence care. If a

taxpayer has become physically or

mentally incapable of self-care and the

taxpayer sells or exchanges property

that the taxpayer owned and used as the

taxpayer’s principal residence for a

period aggregating at least 1 year during

the 5-year period preceding the sale or

exchange, the taxpayer is treated as

using the property as the taxpayer’s

principal residence for any period of

time during the 5-year period in which

the taxpayer owns the property and

resides in any facility (including a

nursing home) licensed by a State or

political subdivision to care for an

individual in the taxpayer’s condition.

(f) Sales of remainder interests—(1) In

general. A taxpayer may elect to have

the section 121 exclusion apply to gain

from the sale or exchange of a remainder

interest in the taxpayer’s principal

residence.

(2) Limitations—(i) Sale or exchange

of any other interest. If a taxpayer elects

to exclude gain from the sale or

exchange of a remainder interest in the

taxpayer’s principal residence, the

section 121 exclusion will not apply to

a sale or exchange of any other interest

in the residence that is sold or

exchanged separately.

(ii) Sales to related parties. Paragraph

(f)(1) of this section will not apply to a

sale or exchange by any person who

bears a relationship to the taxpayer

which is described in section 267(b) or

707(b).

(3) Election. The taxpayer makes the

election under this paragraph (f) by

filing a return for the taxable year of the

sale or exchange that does not include

the gain from the sale or exchange of the

remainder interest in the taxpayer’s

gross income.

(g) No exclusion for expatriates. The

section 121 exclusion will not apply to

any sale or exchange by an individual

if the treatment provided by section

877(a)(1) (relating to the treatment of

expatriates) applies to the individual.

(h) Election to have section not apply.

A taxpayer may elect to have the section

121 exclusion not apply to a sale or

exchange of property. The taxpayer

makes the election by filing a return for

the taxable year of the sale or exchange

that includes the gain from the sale or

exchange of the taxpayer’s principal

residence in the taxpayer’s gross

income.

(i) Residences acquired in rollovers

under section 1034. If a taxpayer

acquires property (section 121 property)

in a transaction that qualifies under

section 1034 for the nonrecognition of

gain realized on the sale or exchange of

another property (section 1034 property)

and later sells or exchanges the section

121 property, in determining the period

of the taxpayer’s ownership and use of

the sold or exchanged section 121

property, the taxpayer may include the

periods that the taxpayer owned and

used the section 1034 property as the

taxpayer’s principal residence (and each

prior residence taken into account

under section 1223(7) in determining

the holding period of the 1034

property).

§ 1.121–5 [Removed]

Par. 3. Section 1.121–5 is removed.

Par. 4. Section 1.1398–3 is added to

read as follows:

§ 1.1398–3 Treatment of section 121

exclusion in individuals’ title 11 cases.

(a) Scope. This section applies to

cases under chapter 7 or chapter 11 of

title 11 of the United States Code, but

only if the debtor is an individual.

(b) Definition and rules of general

application. For purposes of this

section, section 121 exclusion means

the exclusion of gain from the sale or

exchange of a debtor’s principal

residence available under section 121.

(c) Estate succeeds to exclusion upon

commencement of case. The bankruptcy

estate succeeds to and takes into

account the section 121 exclusion with

respect to the property transferred into

the estate.

(d) Effective date. This section is

applicable for sales or exchanges that

occur on or after the date these

regulations are published as final

regulations in the Federal Register.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

[FR Doc. 00–25482 Filed 10–6–00; 8:45 am]

BILLING CODE 4830–01–U

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 52

[VA 4053; FRL–6883–5]

Approval and Promulgation of Air

Quality Implementation Plans; Virginia;

Approval of VOC and NOX RACT

Determinations

AGENCY: Environmental Protection

Agency (EPA).

ACTION: Proposed rule.

SUMMARY: EPA is proposing to approve

revisions to the Commonwealth of

Virginia’s State Implementation Plan

(SIP) which would establish reasonably

available control technology (RACT)

requirements for 16 major sources of

volatile organic compound (VOC) and/

or nitrogen oxide (NOX)emissions.

DATES: Written comments must be

received on or before November 9, 2000.

ADDRESSES: Written comments may be

mailed to Makeba Morris, Chief, Permits

and Technical Assessment Branch,

Mailcode 3AP11, U.S. Environmental

Protection Agency, Region III, 1650

Arch Street, Philadelphia, Pennsylvania

19103. Copies of the documents relevant

to this action are available for public

inspection during normal business

hours at the Air Protection Division,

U.S. Environmental Protection Agency,

Region III, 1650 Arch Street,

Philadelphia, Pennsylvania 19103 and

at the Virginia Department of

Environmental Quality, 629 East Main

Street, Richmond, Virginia 23219.

FOR FURTHER INFORMATION CONTACT: Ray

Chalmers, at (215) 814–2061, or by email at chalmers.ray@epa.gov. Please

note that while questions and requests

for the Technical Support Document

(TSD) prepared in support of this

rulemaking may be submitted via email, any comments on the proposed

action must be submitted, in writing, to

the Region III address as indicated

above.

SUPPLEMENTARY INFORMATION:

I. Background Information Regarding

RACT Requirements

Pursuant to sections 182 and 184 of

the Clean Air Act (CAA), States are

required to implement RACT for major

sources of volatile organic compounds

(VOCs) and/or nitrogen oxides (NOX)

emissions which are: (1) Located in

those areas which have not attained the

National Ambient Air Quality Standard

for ozone (ozone nonattainment areas)

which are designated in 40 CFR part 81

as having moderate or above

nonattainment problems; or (2) located

in the ozone transport region (OTR),

which was established by section 184 of

the CAA. A source is defined as major

if its VOC and/or NOX emissions exceed

specified levels, defined in sections 182

and 184 of the CAA, which vary

depending upon the ozone air quality

designation of the area where the source

is located, and on whether or not the

source is located in the OTR.

Pursuant to the CAA’s requirements,

the Commonwealth of Virginia (the

Commonwealth) submitted revisions to

its SIP consisting of regulations

pertaining to RACT requirements for

major NOX and VOC sources located in

ozone nonattainment areas and in its

portion of the OTR. The

Commonwealth’s regulation pertaining

to RACT requirements for major NOX

sources, for which EPA granted