[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.44-2]

[Page 197-199]
 
                       TITLE 26--INTERNAL REVENUE
 
     CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.44-2  Property to which credit for purchase of new principal residence applies.

    The provisions of section 44 and the regulations thereunder apply to 
a new principal residence which satisfies the following conditions:
    (a) Construction. The construction of the residence must have begun 
before March 26, 1975. For this purpose construction is considered to 
have commenced in the following circumstances:
    (1)(i) Except as provided in subparagraph (2) of this paragraph, 
construction is considered to commence when actual physical work of a 
significant amount has occurred on the building site of the residence. A 
significant amount of construction requires more than drilling to 
determine soil conditions, preparation of an architect's sketches, 
securing of a building permit, or grading of the land. Land preparation 
and improvements such as the clearing and grading (excavation or 
filling), construction of roads and sidewalks, and installation of 
sewers and utilities are not considered commencement of construction of 
the residence even though they might involve a significant expenditure. 
However, driving pilings for the foundation, digging of the footings, 
excavation of the building foundation, pouring of floor slabs, or 
construction of compacted earthen pads when specifically prepared and 
designed for a particular residential

[[Page 198]]

structure and not merely as a part of the overall land preparation, 
constitute a significant amount of construction of the residence. In the 
case of a housing or condominium development construction of 
recreational facilities no matter how extensive does not by itself 
constitute commencement of construction of any residential unit. 
However, where residential units are part of a building structure, as in 
the case of certain condominium and cooperative housing units, then 
digging of the footings or excavation of the building foundation 
constitutes commencement of construction for all units in that building.
    (ii) The rules in subdivision (i) of this subparagraph are 
illustrated by the following examples:

    Example 1. A location chosen for a housing development has extremely 
hilly terrain. In order to make the location suitable for development, 
the builder moves large amounts of earth and places it elsewhere on the 
location. In addition, the earth material which has been moved must be 
compacted according to government specifications in order to provide a 
stable base. Such activities constitute land preparation and, therefore, 
do not constitute the commencement of construction.
    Example 2. A location chosen for a housing development has swampy 
and marshy terrain. In order to make the location suitable for 
development the builder utilizes large quantities of fill. This activity 
constitutes land preparation and does not constitute commencement of 
construction.
    Example 3. Assume the same facts as in either Example 1 or Example 2 
except that the builder also constructs an earthen pad of compacted fill 
specifically prepared for a particular residential structure and not 
merely as a part of the overall land preparation. Construction of the 
compacted earthen pad is considered in the same light as excavation of 
the building foundation and accordingly constitutes commencement of 
construction.

    (2) Construction of a factory-made home (as defined in paragraph (e) 
of Sec. 1.44-5) is considered to have commenced when construction of 
important parts of the factory-made home has commenced. For this 
purpose, commencement of construction of important parts means the 
cutting and shaping or welding of structural components for a specific 
identifiable factory-made home, whether the work was done by the 
manufacturer of the home or by a subcontractor thereof.
    (b) Acquisition and occupancy. The residence must be acquired and 
occupied by the taxpayer after March 12, 1975, and before January 1, 
1977. For this purpose a taxpayer ``acquires'' a residence when legal 
title to it is conveyed to him at settlement, or he has possession of it 
pursuant to a binding purchase contract under which he makes periodic 
payments until he becomes entitled under the contract to demand 
conveyance of title. A taxpayer ``occupies'' a residence when he or his 
spouse physically occupies it. Thus, for example, moving of furniture or 
other household effects into the residence or physical occupancy by a 
dependent child of the taxpayer is not ``occupancy'' for purposes of 
this paragraph. The credit may be claimed when both the acquisition and 
occupancy tests have been satisfied. Thus, where a taxpayer meets the 
acquisition and occupancy tests set forth above after March 12, 1975, 
and before January 1, 1976, the credit is allowable for 1975. Where a 
taxpayer occupied a residence prior to March 13, 1975, without having 
acquired it (as where his occupancy was pursuant to a leasing 
arrangement pending settlement under a binding contract to purchase or 
pursuant to a leasing arrangement where a written option to purchase was 
contained in the original lease agreement) he will nonetheless satisfy 
the acquisition and occupancy tests set forth above if he acquires the 
residence and continues to occupy it after March 12, 1975, and before 
January 1, 1977.
    (c) Binding contract. Except in the case of self-construction, the 
new principal residence must be acquired by the taxpayer (within the 
meaning of paragraph (b) of this section) under a binding contract 
entered into by the taxpayer before January 1, 1976. An otherwise 
binding contract for the purchase of a residence which is conditioned 
upon the purchaser's obtaining a loan for the purchase of the residence 
(including conditions as to the amount or interest rate of such loan) is 
considered binding notwithstanding that condition.
    (d) Self-constructed residence. A self-constructed residence (as 
defined in

[[Page 199]]

paragraph (d) of Sec. 1.44-5) must be occupied by the taxpayer before 
January 1, 1977. Where self-construction of a principal residence was 
begun before March 13, 1975, only that portion of the basis of the 
property allocable to construction after March 12, 1975, and before 
January 1, 1977, shall be taken into consideration in determining the 
amount of the credit allowable. For this purpose, the portion of the 
basis attributable to the pre-March 13 period includes the total cost of 
land acquired (as defined in paragraph (b) of this section) prior to 
March 13, 1975, on which the new principal residence is constructed and 
the cost of expenditures with respect to construction work performed 
prior to March 13, 1975. The costs incurred in stockpiling materials for 
later stages of construction, however, are not allocated to the pre-
March 13 period. Thus, for example, if prior to March 13, 1975, a 
taxpayer who qualifies for the credit has constructed a portion of a 
residence at a cost of $10,000 (including the cost of the land purchased 
prior to March 13, 1975) and the total cost of the residence is $40,000 
and the taxpayer's basis after the application of section 1034(e) 
(relating to the reduction of basis of new principal residence where 
gain is not recognized upon the sale of the old residence) is $36,000, 
the amount subject to the credit will be $27,000:

                      ($30,000/$40,000) x $36,000.

[T.D. 7391, 40 FR 55852, Dec. 2, 1975; 40 FR 58138, Dec. 15, 1975]