[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: 26CFR1.44-4]

[Page 203-204]
 
                       TITLE 26--INTERNAL REVENUE
 
     CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.44-4  Recapture for certain dispositions.

    (a) In general. (1) Under section 44(d) except as provided in 
paragraphs (b) and (c) of this section, if the taxpayer disposes of 
property, with respect to the purchase of which a credit was allowed 
under section 44(a), at any time within 36 months after the date on 
which he acquired it (or, in the case of construction by the taxpayer, 
the date on which he first occupied it as his principal residence), then 
the tax imposed under chapter 1 of the Code for the taxable year in 
which the replacement period (as provided under subparagraph (2) of this 
paragraph) terminates is increased by an amount equal to the amount 
allowed as a credit for the purchase of such property.
    (2) The replacement period is the period provided for purchase of a 
new principal residence under section 1034 of the Code without 
recognition of gain on the sale of the old residence. In the case of 
residences sold or exchanged after December 31, 1974, it is generally 18 
months in the case of acquisition by purchase and 2 years in the case of 
construction by the taxpayer provided, however, that such construction 
has commenced within the 18-month period. Thus, a calendar-year taxpayer 
who disposes of his old principal residence in December 1975 and does 
not qualify under paragraph (b) or (c) of this section will include the 
amount previously allowed as additional tax on his 1977 tax return.
    (3) Except as provided in paragraphs (b) and (c) of this section, 
section 44(d) applies to all dispositions of property, including sales 
(including foreclosure sales), exchanges (including tax-free exchanges 
such as those under sections 351, 721, and 1031), and gifts.
    (4) In the case of a husband and wife who were allowed a credit 
under section 44(a) claimed on a joint return, for the purpose of 
section 44(d) and this section the credit shall be allocated between the 
spouses in accordance with the provisions of paragraph (b)(3) of 
Sec. 1.44-1.
    (b) Acquisition of a new residence. (1) Section 44(d)(1) and 
paragraph (a) of this section shall not apply to a disposition of 
property with respect to the purchase of which a credit was allowed 
under section 44(a) in the case of a taxpayer who purchases or 
constructs a new principal residence (within the meaning of Sec. 1.44-
5(a)) within the applicable replacement period provided in section 1034. 
In determining whether a new principal residence qualifies for purposes 
of this section the rules relating to construction, acquisition, and 
occupancy under Sec. 1.44-2 do not apply. Where a disposition has 
occurred and the taxpayer's purchase (or construction) costs of a new 
principal residence are less than the adjusted sales price (as defined 
in section 1034(b)) of the old residence, the tax imposed by chapter 1 
of the Code for the taxable year following the taxable year during which 
disposition occurs is increased by an amount which bears the same ratio 
to the amount allowed as a credit for the purchase of the old residence 
as (i) the adjusted sales price of the old residence (within the meaning 
of section 1034), reduced (but not below zero) by the taxpayer's cost of 
purchasing (or constructing) the new residence (within the meaning of 
such section) bears to (ii) the adjusted sales price of the old 
residence.
    (2) The rules of subparagraph (1) of this paragraph may be 
illustrated by the following example:

    Example. On July 15, 1975, A purchases a new principal residence for 
a total purchase price of $40,000. The property meets the tests of 
Sec. 1.44-2, and A is allowed a credit of $2,000 on his 1975 tax return. 
On January 15, 1977 (within 36 months after acquisition) A sells his 
residence for an adjusted sales price of $50,000 and on March 15, 1977, 
purchases a new principal residence at a cost of $40,000. Since the new 
principal residence was purchased within the 18-month replacement period 
(provided in section 1034), the amount recaptured is limited to $400, 
determined by multiplying the amount of the credit allowed ($2,000) by a 
fraction, the numerator of which is $10,000 (determined by reducing the 
adjusted sales price of the old residence

[[Page 204]]

($50,000) by A's cost of purchasing the new principal residence 
($40,000)) and the denominator of which is $50,000 (the adjusted sales 
price). Therefore, A's tax liability for 1978, the year following the 
taxable year in which the disposition occurred, is increased by $400.

    (c) Certain involuntary dispositions. Section 44(d)(1) and paragraph 
(a) of this section shall not apply to the following:
    (1) A disposition of a residence made on account of the death of any 
individual having a legal or equitable interest therein occurring during 
the 36-month period described in paragraph (a) of this section,
    (2) A disposition of the residence if it is substantially or 
completely destroyed by a casualty described in section 165(c)(3),
    (3) A disposition of the residence if it is compulsorily and 
involuntarily converted within the meaning of section 1033(a), or
    (4) A disposition of the residence pursuant to a settlement in a 
divorce or legal separation proceeding where the other spouse retains 
the residence as principal residence (as defined in Sec. 1.44-5(a)).

[T.D. 7391, 40 FR 55854, Dec. 2, 1975; 40 FR 58138, Dec. 15, 1975]