Comments on Proposed Regulations Under Section 121
May 1, 2001

Prior Submissions on Taxation of the Sale of a Principal Residence

In March 1998, individual members of the ABA Section of Taxation submitted comments to Treasury and the Internal Revenue Service on Section 121 as amended by the Taxpayer Relief Act of 1997. In addition to suggestions for technical corrections, the following recommendations were offered in order to have new Section 121 better meet its intended simplification goals. The first 3 suggestions would require legislative action. ¹ The last 2 suggestions are restated in these comments on the proposed Section 121 regulations.

1. Provide further simplification by eliminating the one-sale-every-two-years limitation, as well as the "forced sale" limitation.
    
2. Provide further simplification and make Section 121 more neutral in its effect on taxpayer financial decisions by eliminating the dollar limitation (or making the dollar limitation applicable only to residences with a sales price exceeding a specific dollar amount).
    
3. If the dollar limitation is not removed, provide transitional relief for individuals who have relied on the long-standing gain deferral rule of former Section 1034.
    
4. Provide further simplification by allowing gain exclusion with respect to de minimis use of a residence as a rental property or home office.
    
5. Add a definition of principal residence that includes land that was part of a principal residence that was destroyed in an involuntary conversion, if it is sold within a time period such that the ownership and use requirement of Section 121 is satisfied.

Over the past several years, individual members of the ABA also have recommended that changes be made to Sections 1034 and 121 to better address the unique situations faced by some military personnel who must reside outside of their principal residence due to active duty assignments. In January 2001 David C. Hague, Chair of the Standing Committee on Legal Assistance for Military Personnel, submitted comments to the Service recommending that the 5-year period under Section 121 be suspended for time spent away from the home for official extended duty (see the Appendix to this letter). We also offer another related suggestion in our comments below on the proposed Section 121 regulations.