Major acreage qualifies as residential for tax break.

• Author: York, James P.

Sec. 121 permits an individual to exclude from income up to $250,000 ($500,000 for joint returns) of gain realized on the sale or exchange of a residence. Schlicher, TC Memo 1997-37, and Rev. Rul. 76-541 allowed a personal residence with large contiguous tracts of land to be bifurcated and sold in separate transactions. It appears that these authorities can be used in conjunction with new Sec. 121 to exclude gain from multiple sales of a large property that has been owned and used as a primary residence.

Neither the Code nor the regulations provide a specific method to ascertain the portion of a large plot of land attributable to nonresidential versus residential use. In Schlicher, the taxpayer had his principal residence on five acres in Livermore, California. He owned horses that he kept on the property, and operated a horse boarding and breeding business on leased property adjoining his five acres. In 1988, Schlicher sold his home, realizing a $419,000 gain. A few months later, he purchased 51 acres of undeveloped land in Clayton, California, for $380,000. Within two years of the Livermore home sale, he constructed a residence, garage and barn on the Clayton property that cost approximately $147,000. He fenced off 7 1/2 acres for a horse boarding and breeding facility, and built a 20-stall barn and paddocks. At no time were boarded horses permitted outside of that part of the property.

The IRS determined a deficiency of almost $100,000 against Schlicher, arguing that only one acre of the Clayton property was used for residential purposes.

Schlicher testified that he personally used the hilly portion of the property for horseback riding, hiking, walking and enjoying the unobstructed view of the countryside. During the springtime, the horses he personally owned grazed there. Finding Schlicher to be a credible witness, the Tax Court concluded that only the 7 1/2 acres he fenced off for the boarding and breeding activity was not part of his personal residence; the remaining 43 1/2 acres were used for residential purposes. The court said that residential purposes may include appreciating nature, living in open spaces, hiking, horseback riding and enjoying unobstructed views of the countryside. Under the standard applied in Schlicher, most personal nonbusiness use would qualify as residential use.

If Schlicher were to sell four 10-acre plots, over, say, a two-year period, from the 43 1/2 acres that qualified as residential use, the Sec. 121...