MODULE 34 TAXES: TRANSACTIONS IN PROPERTY 495

(a) For an owner-user-property must be functionally the same and have same end use (busi-
ness vehicle must be replaced by business vehicle that performs same function).
(b) For a lessor-property must perform same services for lessor (lessor could replace a
rental manufacturing plant with a rental-wholesale grocery warehouse even though ten-

ant's functional use differs). .

(c) A purchase of at least 80% of the stock of a corporation whose property is similar or re-
lated in service or use also qualifies.

(d) More liberal "like-kind" test applies to real property held for business or investment (other
than inventory or property held primarily for sale) that is converted by seizure, condem-
nation, or threat of condemnation (e.g., improved real estate could be replaced with unim-
proved real estate).
(5) If property is not replaced within the time limit, an amended return is filed to recognize gain in
the year realized.

(6) Losses on involuntary conversions are recognized whether the property is replaced or not.
However, a loss on condemnation of property held for personal use (e.g., personal residence)
is not deductible.
c. Sale or exchange of principal residence
(1) An individual may exclude from income up to $250,000 of gain that is realized on the sale or
exchange of a residence, if the individual owned and occupied the residence as a principal
residence foran aggregate of at least two of the five years preceding the sale or exchange. The
amount of excludable gain is increased to $500,000 for married individuals filing jointly if
either spouse meets the ownership requirement, and both spouses meet the use requirement.
.(a), The sale of a residence that had been jointly owned and occupied by the surviving and
deceased spouse is entitled to the $500,000 gain exclusion provided the sale occurs' no
later than 2 years after the date of death of the individual's spouse.
(b) The exclusion does not apply to property acquired in a like-kind exchange after
October 22, 2004, if the sale or exchange of the property occurs during the five-year
period beginning with the date of acquisition of the property.

(c) Gain in excess of the $250,000 (or $500,000) exclusion must' be included in income even
though the sale proceeds are reinvested in another principal residence.

(2) The exclusion is determined on an individual basis.

(a) A single individual who otherwise qualifies for the exclusion is entitled to exclude up to
$250,000 of gain even though the individual marries someone who has used the exclusion
within two years before the marriage.

(b) In the case of married taxpayers who do not share a principal residence but file joint re-
turns, a $250,000 exclusion is available for a qualifying sale or exchange of each spouse's
principal residence.
(3) Special rules apply to divorced taxpayers.
(a) If a residence is transferred to a taxpayer incident to a divorce, the time during which the
taxpayer's spouse or former spouse owned the residence is added to the taxpayer's period
of ownership.

(b) A taxpayer who owns a residence is deemed to use it as a principal residence while the
taxpayer's spouse or former spouse is given use of the residence under the terms of a di-
vorce or separation.

(4) A taxpayer's period of ownership of a residence includes the period during which the tax-
payer's deceased spouse owned the residence so long as the taxpayer does not remarry before
 date of sale.

(5) Tenant-stockholders in a cooperative housing corporation can qualify to exclude gain from the
sale of the stock.
(6) If the taxpayer does not meet the two-year ownership or use requirements, a pro rata amount
of the $250,000 or $500,000 exclusion applies if the sale or exchange is.due to a change in
place of employment, health, or unforeseen circumstances. A taxpayer is deemed to satisfy
the change in employment condition if the taxpayer moves at least fifty miles from his former