For various personal and work-related reasons, individuals may own and use more than one residence at a time. While the proposed regulations provide guidance on how to determine which home is the principal residence (generally, the one used the majority of time each year), they are not clear as to when use of both homes during the year can each count towards the required 24 months of use for Section 121 purposes. Since the general rule of Section 121 is that ownership and use for only 24 months of a 60-month period is required, it appears that Congress did not intend that the homeowner must reside in the home during the entire ownership period in order to obtain the benefits of Section 121. Also, because Section 121 allows for a sale or exchange every 2 years to qualify for gain exclusion, it again appears that Congress intended Section 121 to apply to individuals who concurrently own and use more than one residence. In short, it would seem that a taxpayer could have the “24-month” clock ticking at more than one residence at a time. Also, this result would treat a taxpayer owning and using 2 homes at the same time, similarly to a taxpayer who owns only one home at a time, but owned and used 2 different homes over a 5-year period.
For example, assume that Individual B works in New York and Florida and owns residences in both states. During a 5-year period, B used both homes for over 24 months as a personal residence. Upon sale of either home, B should be entitled to use Section 121. In contrast, assume that Individual C works in New York and owns and uses a home there. After 2 years of such use, C moves to Florida and buys a home and uses it as a personal residence for 2 years. Both of C’s homes are eligible for gain exclusion under Section 121 (although C (as well as B) would generally only be able to use the exclusion once in a 2-year period). In these examples, both B and C should be treated similarly in measuring their use of a residence for Section 121 purposes. It should not matter that B used both residences each year over 4 years while C only used one residence in each 2-year period.
Recommendation: Prop. Reg. §1.121-1(c) should be clarified to address the above example. The proposed regulations assume that a person cannot have more than one principal residence per calendar year unless there has been a sale of an old home and purchase of a new home. In Example 10 in Prop. Reg. §1.121-1(f), where a person uses a home in New York for 7 months during the year and a Florida home for 5 months, nothing in Section 121 prohibits considering each home as a principal residence during the time it is used. During the year, the homeowner would accumulate 7 months of use under Section 121 of the New York home and 5 months of Section 121 use of the Florida home. This treatment puts this taxpayer on a par with an individual who, during a 5-year period uses a New York home as a principal residence from January 1, 1998 to December 31, 1999 and then uses a Florida home from January 1, 2000 to December 31, 2001. Section 121 does not appear intended to limit taxpayers to only accumulating months of “use” during a single calendar year on just one home.
Example 10 in Prop. Reg. §1.121-1(f) should be clarified to state that both the 7 months spent in the New York home and the 5 months spent in the Florida home each year count towards use of a residence for each home separately if the facts and circumstances indicate that each is used as a principal residence while it is used during the year. The key point of the example then would be that the 5 months in Florida do not constitute a temporary absence from the New York home, and, therefore, the 5 months do not count as use of the New York home for Section 121 purposes.
