[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: 26CFR1.44-5]

[Page 204-206]
 
                       TITLE 26--INTERNAL REVENUE
 
     CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.44-5  Definitions.

    For purposes of section 44 and the regulations thereunder--
    (a) New principal residence. The term ``new principal residence'' 
means a principal residence, the original use of which commences with 
the taxpayer. The term ``principal residence'' has the same meaning as 
under section 1034 of the Code. For this purpose, the term ``residence'' 
includes, without being limited to, a single family structure, a 
residential unit in a condominium or cooperative housing project, a 
townhouse, and a factory-made home. In the case of a tenant-stockholder 
in a cooperative housing corporation references to property used by the 
taxpayer as his principal residence and references to the residence of a 
taxpayer shall include stock held by the tenant-stockholder in a 
cooperative housing project provided, however, that the taxpayer used as 
his principal residence the house or apartment which he was entitled as 
such stockholder to occupy. ``Original use'' of the new principal 
residence by the taxpayer means that such residence has never been used 
as a residence prior to its use as such by the taxpayer. For this 
purpose, a residence will qualify if the first occupancy was by the 
taxpayer pursuant to a lease arrangement pending settlement under a 
binding contract to purchase or pursuant to a lease arrangement where a 
written option to purchase the then existing residence was contained in 
the original lease agreement.

A renovated building does not qualify as new, regardless of the extent 
of the renovation nor does a condominium conversion qualify.
    (b) Purchase price--(1) General rule. For purposes of section 44(a) 
and Sec. 1.44-1, the term ``purchase price'' means the adjusted basis of 
the new principal residence on the date of acquisition and includes all 
amounts attributable to the acquisition or construction, but only to the 
extent that such amounts constitute capital expenditures and are not 
allowable as deductions in computing taxable income. Such capital 
expenditures include but are not limited to the cost of acquisition or 
construction, title insurance, attorney's fees, transfer taxes, and 
other costs of transfer. For these purposes the adjusted basis of a 
factory-made home includes the cost of moving the home and setting it up 
as the taxpayer's principal residence only where such cost is included 
in the base price of the residence; it also includes the purchase price 
of the land on which the home is located, but only if such land was 
purchased by the taxpayer after March 12, 1975 and only if the taxpayer 
acquired the land prior to or in conjunction with the acquisition of 
such factory-made home. However, the adjusted basis does not include any 
expenditures involved in connection with the leasing of land on which 
the factory-made home is located. In the case of factory-made homes the 
adjusted basis includes furniture only where it is included in the base 
price of the unit.
    (2) Sale of old principal residence. (i) The adjusted basis is 
reduced by any gain from the sale or involuntary conversion of an old 
principal residence, which is not recognized due to the application of 
section 1033 or section 1034.

[[Page 205]]

However, no reduction will be made for any gain excluded from tax by 
reason of the special treatment provided under the tax laws in the case 
of a sale by a taxpayer who has attained age 65 (section 121 of the 
code).
    (ii) The rules in subdivision (i) of this subparagraph are 
illustrated by the following examples:

    Example 1. A sells an old principal residence for $30,000 which has 
an adjusted basis of $20,000. A reinvests the proceeds by purchasing a 
new principal residence for $40,000 (including settlement costs which 
are capital in nature), and this purchase satisfies the statutory 
criteria under section 1034 for nonrecognition of gain. The credit under 
section 44 applies with respect to $30,000 ($40,000 costs minus $10,000 
unrecognized gain) of the cost of the new principal residence.
    Example 2. B and C, two sisters, purchase a new principal residence 
as joint tenants with the right of survivorship for a total purchase 
price of $40,000. B has previously sold her old principal residence for 
$25,000 and a $10,000 gain on the sale has qualified for nonrecognition 
under section 1034. B contributes $25,000 and C contributes $15,000. The 
adjusted basis of the new principal residence is $30,000 representing 
the total purchase price of $40,000 less $10,000 representing 
unrecognized gain under section 1034. The total credit allowable, 
therefore, is $1,500. Since joint tenants are treated as equal owners 
and since allocation of the credit is made in proportion to the 
taxpayer's respective ownership interests in such residence B and C each 
will receive a credit of $750.
    Example 3. Taxpayer D is 65 years old and sells his old principal 
residence for $20,000 excluding all gain under section 121. He then 
purchases a new principal residence for $30,000. D's adjusted basis in 
his new principal residence is $30,000, and he is allowed a credit of 
$1,500.

    (3) Tie-in sales. In the case of a purchase of a new principal 
residence which is tied in to the transfer of other property by the 
seller to the purchaser, whether purportedly by sale or gift, the 
adjusted basis of the residence is reduced by the amount of the excess 
of the fair market value of such other property received over the 
amount, if any, purportedly paid for it by the purchaser of the 
residence. For example, if a taxpayer receives a new car with a fair 
market value of $2,500 upon the purchase of a condominium apartment for 
a total purchase price of $40,000 (including settlement costs which are 
capital in nature) his adjusted basis in the residence for computation 
of the credit is $37,500.
    (4) Basis of new principal residence. The taxpayer's basis in his 
new principal residence is not in any way affected by the allowance of 
the credit.
    (c) Purchase--(1) General rule. Except as provided in subparagraph 
(2) of this paragraph, the term ``purchase'' means any acquisition of 
property.
    (2) Exceptions. (i) An acquisition does not qualify as a purchase 
for the purpose of this paragraph if the property is acquired from a 
person whose relationship to the person acquiring it would result in the 
disallowance of losses under section 267 or 707(b). Such persons 
include--
    (A) The purchaser's spouse, ancestors and lineal descendants,
    (B) Related corporations as provided under section 267(b)(2),
    (C) Related trusts as provided under section 267(b), (4), (5), (6), 
and (7),
    (D) Related charitable organizations as provided under section 
267(b)(9), and
    (E) Related partnerships as provided under section 707(b)(1).

For purposes of this subdivision the constructive ownership rules of 
section 267(c) shall apply except that paragraph (4) of section 267(c) 
shall be treated as providing that the family of an individual shall 
include only his spouse, ancestors, and lineal descendants.
    (ii) An acquisition does not qualify as a purchase for the purpose 
of this paragraph if the basis of the property in the hands of the 
person acquiring such property is determined--
    (A) In whole or in part by reference to the adjusted basis of such 
property in the hands of the person from whom acquired (e.g., a gift 
under section 1015), or
    (B) Under section 1014(a) (relating to property acquired from a 
decedent).
    (d) Self-construction. The term ``self-construction'' means the 
construction of a residence (other than a factory-made home) to the 
taxpayer's specifications on land already owned or leased by the 
taxpayer at the time of commencement of construction. Thus, where a 
taxpayer purchases land and either builds a residence himself or hires 
an architect and a contractor to

[[Page 206]]

build a residence on that land, the taxpayer has ``self-constructed'' 
the residence.
    (e) Factory-made home. The term ``factory-made homes'' includes 
mobile homes, houseboats and prefabricated and modular homes.
    (f) Lowest offer. The term ``lowest offer'' means the lowest price 
at which the residence was offered for sale after February 28, 1975.

[T.D. 7391, 40 FR 55855, Dec. 2, 1975]