Specific Comments on the Proposed Section 121 Regulations
(Reg-105235-99; October 10, 2000)
May 1, 2001

III.  Form of Ownership of a Principal Residence

Background
Section 121 applies to a taxpayer who has owned and used a home. In most instances, this provision does not raise any issues because an individual directly owns and uses the home. However, some individuals have placed their residences into trusts or other entities and rulings have been issued in the past as to how former Sections 121 and 1034 applied to such ownership. ⁷

The Section 121 proposed regulations were issued along with Prop. Reg. §1.1398-3 to state officially the Service’s position as to the application of Section 121 for residences held by a bankruptcy estate in response to differing court opinions. It states that the bankruptcy estate of an individual succeeds to and takes into account the individual Section 121 exclusion if the individual satisfies the requirements of Section 121(a). The proposed regulations do not address other forms of ownership.

Comments
For years, individuals, for varying reasons, have sometimes opted to hold their principal residence in some type of trust. Court cases and private letter rulings have been issued to address the application of former Section 121 and both former and present Section 121 to these forms of ownership. However, guidance is incomplete.

Recommendation: The Section 121 regulations should be expanded to provide guidance on the types of ownership of a residence that will and will not qualify the owner for the Section 121 exclusion. Given the variety of forms of ownership that may be used (revocable trusts, irrevocable trusts, partnerships, etc.), it would be most useful for the Service to provide a list of factors that must exist in order for the beneficial owner to be able to use the Section 121 gain exclusion.