RULES AND REGULATIONS
Title 61--REVENUE
DEPARTMENT OF REVENUE
[61 PA. CODE CH. 103]
Personal Income Tax; Net Gains or Income from Disposition of Property
[28 Pa.B. 5104] The Department of Revenue (Department), under the authority contained in section 354 of the Tax Reform Code of 1971 (TRC) (72 P. S. § 7354) and section 20 of the act of April 23, 1998 (P. L. 239, No. 45) (Act 45), by this notice of proposed rulemaking omitted, adopts amendments to § 103.13 (relating to net gains or income from disposition of property) to read as set forth in Annex A.
Purpose of Amendment
The amendment of § 103.13 is the result of statutory changes set forth in Act 45. Act 45 repeals the current rules for determining whether gain from the sale or other disposition of a principal residence is subject to the personal income tax. The statutory change is effective for taxable years beginning after December 31, 1997.
Explanation of Regulatory Requirements
The heading of subsection (g) of § 103.13 has been amended to address the exclusion of gain from sale of a principal residence before January 1, 1998. Prior to January 1, 1998, and subject to the limitations of § 103.13(g)(2), and except as provided in § 103.13(g)(1)(iii), (3) or (5), a taxpayer could elect to exclude the taxpayer's portion of the aggregate gain realized on the sale of a residence only under the following conditions:
* The taxpayer is at least 55 years of age on the date of sale.
* The taxpayer used the residence as his principal residence for periods aggregating 3 years or more, during the 5-year period ending on the date of sale.
* The taxpayer owned the residence for periods aggregating 3 years or more, during the 5-year period ending on the date of sale.
* The date of sale of the residence is after June 30, 1987.
* The taxpayer has not previously made an election under § 103.13(g)(1)(i) for Pennsylvania tax purposes or has revoked previous elections.
A new subsection (h) has been added to § 103.13 to address the exclusion of all gain from disposition of a principal residence after December 31, 1997. Paragraph (1) provides that an individual may exclude from tax gain realized on the sale or other disposition of a principal residence if the conditions in subparagraphs (i)--(iv) are met.
Section 103.13(h)(2) provides that for purposes of paragraph (1)(iv), it shall be immaterial that a prior disposition was delayed due to market exigencies or other reason. Section 103.13(h)(3)(i) explains how situations where a taxpayer holds title to a residence with a spouse or other person as joint tenants, tenants in common or tenants by the entireties are handled; subparagraph (ii) explains how Act 45 applies when a joint return of income is made with respect to the sale of a married couple's jointly owned residence. Subparagraphs (iii)--(v) under subsection (h)(3) explain how Act 45 applies regarding unmarried widow or widower, tenant-stockholders in cooperative housing corporations and when an estate is the taxpayer.
Section 103.13(h)(3) explains in subparagraph (vi) what is a principal residence and the use and ownership requirements. For purposes of the new § 103.13(h), subparagraph (vii) under paragraph (3) defines the word ''disposition'' and explains what is meant by the phrase ''date of disposition.'' Subparagraph (viii) explains the rules that apply when the property consists of farms, duplexes and other mixed use property. Subparagraph (ix) addresses the rules pertaining to depreciable property and subparagraph (x) explains how split interests are addressed.
The existing subsections (h), (i) and (j) under § 103.13 are relettered as (i), (j) and (k) accordingly. No other revisions are being made to these subsections.
Fiscal Impact
The Department has determined that the amendment will have no significant fiscal impact on the Commonwealth.
Paperwork
The amendment will not generate additional paperwork for the public or the Commonwealth.
Effectiveness/Sunset Date
The amendment will become effective upon final publication in the Pennsylvania Bulletin. The amendment is scheduled for review within 5 years of final publication. No sunset date has been assigned.
Contact Person
The contact person for an explanation of the amendment is Anita M. Doucette, Office of Chief Counsel, PA Department of Revenue, Dept. 281061, Harrisburg, PA 17128-1061.
Statutory Authority
The amendment is promulgated under section 354 of the TRC and section 20 of Act 45.
Regulatory Review
In accordance with section 20 of Act 45, the Department was directed to promulgate regulations which are final-form regulation, under the Regulatory Review Act, and omit notice of proposed rulemaking under section 201 of the act of July 31, 1968 (P. L. 769, No. 240), referred to as the Commonwealth Documents Law. Section 20 of Act 45-1998 also requires the regulation to be submitted to the Legislative Reference Bureau by November 24, 1998, for publication in the Pennsylvania Bulletin.
Under section 5.1(c) of the Regulatory Review Act (71 P. S. § 745.5a(c)), on August 25, 1998, the Department submitted a copy of the final-form regulation with proposed rulemaking omitted to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the House Committee on Finance and the Senate Committee on Finance. On the same date, the final-form regulation was submitted to the Office of Attorney General for review and approval under the Commonwealth Attorneys Act (71 P. S. §§ 732-101--732-506). In accordance with section 5.1(d) of the Regulatory Review Act, the final-form regulation was deemed approved by the House and Senate Committees on September 14, 1998. IRRC met on September 24, 1998, and approved the final-form regulation.
Findings
The Department finds that the amendment is necessary and appropriate for the administration and enforcement of the authorizing statute. In accordance with section 20 of Act 45, the Department was directed to promulgate regulations which are final-form regulations, under the Regulatory Review Act, and omit notice of proposed rulemaking under section 201 of the act of July 31, 1968 (P. L. 769, No. 240) (45 P. S. § 1201).
Order
The Department, acting under the authorizing statute, orders that:
(a) The regulations of the Department, 61 Pa. Code Chapter 103, are amended by amending § 103.13 to read as set forth in Annex A, with elipses referring to the existing text of the regulation.
(b) The Secretary of the Department shall submit this order and Annex A to the Office of General Counsel and the Office of Attorney General for approval as to form and legality as required by law.
(c) The Secretary of the Department shall certify this order and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(d) This order shall take effect upon publication in the Pennsylvania Bulletin.
ROBERT A. JUDGE, Sr.
SecretaryFiscal Note: 15-405. No fiscal impact; (8) recommends adoption.
Annex A
TITLE 61. REVENUE
PART I. DEPARTMENT OF REVENUE
Subpart B. GENERAL FUND REVENUES
ARTICLE V. PERSONAL INCOME TAX
CHAPTER 103. IMPOSITION AND DETERMINATION OF TAX § 103.13. Net gains or income from disposition of property.
* * * * * (g) Exclusion of gain from sale of principal residence before January 1, 1998.
(1) Eligible individuals. In determining whether an individual is eligible to claim the exclusion of gain from the sale of a principal residence, the individual shall comply with the following:
(i) Subject to the limitations of paragraph (2), and except as provided in subparagraph (iii), paragraph (3) or paragraph (5), a taxpayer may elect to exclude the taxpayer's portion of the aggregate gain realized on the sale of a residence only under the following conditions:
(A) The taxpayer is at least 55 years of age on the date of sale.
(B) The taxpayer used the residence as his principal residence for periods aggregating 3 years or more, during the 5-year period ending on the date of sale.
(C) The taxpayer owned the residence for periods aggregating 3 years or more, during the 5-year period ending on the date of sale.
(D) The date of sale of the residence is after June 30, 1987, and before January 1, 1998.
(E) The taxpayer has not previously made an election under this subparagraph for Pennsylvania tax purposes or has revoked previous elections.
* * * * * (h) Exclusion of all gain from disposition of principal residence after December 31, 1997.
(1) Eligible individuals. An individual may exclude from tax gain realized on the sale or other disposition of the taxpayer's principal residence of the following conditions are met:
(i) The date of disposition of the residence is after December 31, 1997.
(ii) The taxpayer used the residence as his principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of its disposition.
(iii) The taxpayer owned the residence for periods aggregating 2 years or more during the 5-year period ending on the date of its disposition.
(iv) One of the following applies:
(A) During the 2-year period ending on the date of disposition of the taxpayer's principal residence, there was no prior disposition by the taxpayer of a principal residence.
(B) The disposition of the taxpayer's principal residence is by reason of an unforeseen change in employment or health or severe financial hardship to the taxpayer resulting from a sudden and unexpected accident, loss of property due to casualty or other similar extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the taxpayer.
(2) Market exigencies. For purposes of paragraph (1)(iv), it shall be immaterial that a prior disposition was delayed due to market exigencies or other reason.
(3) Ownership and use conditons. For purposes of paragraph (1):
(i) Exception. Except as provided in subparagraph (ii), when a taxpayer holds title to a residence with a spouse or other person as joint tenants, tenants in common or tenants by the entireties, the ownership and use conditions in paragraph (1) apply separately to each coowner and only the coowner who meets the conditions of paragraph (1) may claim the exclusion.
(ii) Joint return. When a joint return of income is made with respect to the disposition of a married couple's jointly owned residence, it is not necessary that both spouses satisfy the ownership and use conditions of paragraph (1). If one spouse satisfies the conditions, both spouses shall be considered to satisfy the conditions. If separate returns of income are made, the general rule that the ownership and use conditions apply separately to each spouse is applicable and only the spouse who meets ownership and use conditions may make an election.
(iii) Unmarried widow or widower. If a decedent, during the 5-year period ending on the date of disposition, satisfied both ownership and use conditions with respect to the property sold, the surviving spouse is also treated as satisfying the ownership and use conditions if not remarried.
(iv) Tenant-stockholders in cooperative housing corporations. An individual who holds stock as a tenant-stockholder in a cooperative housing corporation may qualify for exclusion with respect to the disposition of the stock. To determine whether a taxpayer meets requirements, the usual ownership conditions are applied to the holding of the stock and the usual use conditions are applied to the house or apartment which the taxpayer is entitled to occupy because of the taxpayer's stock ownership.
(v) Estate as taxpayer. A disposition made by an estate will not qualify for the exclusion, unless the disposition is under an executory contract made prior to death by an individual meeting the ownership and use conditions.
(vi) Principal residence; use and ownership conditions.
(A) A residence is a house, lodging or place of habitation, including a trailer or condominium, which:
(I) Has independent or self-contained cooking, sleeping and sanitation facilities.
(II) Is physically occupied and used for residential purposes by the taxpayer.
(B) The ownership and use conditions need not be met simultaneously. Both tests shall be met during the 5-year period preceding the date of the disposition. For example, a lessee could rent a residence for 1 year, then purchase the residence and again live in it for only 1 of the 4 following years and could still qualify for the election.
(C) The residence which the taxpayer physically occupies the most within a time period shall be his principal residence for the period. When a taxpayer alternates between homes, the home that he personally occupies the most shall be considered his principal residence. The test of physical occupancy is not satisfied by merely moving furniture or other personal belongings into a residence without actually living there or by the taxpayer's family's physical occupancy.
(D) In determining whether a residence has been occupied and used for residential purposes, a taxpayer need not consider temporary absences from the principal residence if the residence was not rented during the taxpayer's absence. A temporary absence is an absence of less than 90 consecutive days or an absence of any length when the taxpayer is convalescing in a hospital, nursing home or a personal care facility.
(vii) Disposition and date of disposition.
(A) For purposes of this subsection, the word ''disposition'' means a sale, exchange, taking by eminent domain, destruction or other conversion of property into cash or other property giving rise to taxable gain. The date of disposition by sale of a principal residence is the date on which the deed is accepted by the buyer and title passes--ordinarily, the date of settlement--or, if delivery of the deed is postponed, the date on which possession and the burdens and benefits of beneficial ownership pass from the seller to the buyer under the contract of sale.
(B) The date a taxpayer received condemnation proceeds giving rise to taxable gain will be considered the date of disposition in the case of a condemnation. In the case of the destruction of a residence, the date the taxpayer receives casualty insurance proceeds or damages giving rise to taxable gain will be considered the date of disposition.
(viii) Farms, duplexes and other mixed use property. If the property sold includes business or rental property or the land surrounding the residence is in excess of that which is reasonably necessary for the use of the dwelling as a home, special rules apply:
(A) Where the land surrounding the residence is in excess of that which is reasonably necessary for the use of the dwelling as a home, only the portion of the gain on the disposition of the property allocable to the portion used as a residence is subject to the exclusion. Real estate used for commercial farming or for another commercial purpose is not reasonably necessary for the use of the dwelling as a home.
(B) If a residence includes business or rental premises, only that portion of gain on the disposition of the property allocable to the portion used as a residence is subject to the exclusion. Examples include a sole proprietor's residence above the sole proprietor's store, an office in home and a duplex where one unit is rented.
(ix) Depreciable property. If, at any time during the taxpayer's holding period, any portion of the principal residence sold was ever subject to the allowance for depreciation, only that part of gain on the disposition of the principal residence that is allocable to the portion of the principal residence which has never been subject to the allowance is subject to the exclusion.
(x) Split interests. A taxpayer's disposition of an immediate possessory interest, remainder interest or other interest in his principal residence shall qualify for exclusion, if the taxpayer would have qualified had he disposed of the entire interest in the property.
(i) Accounting methods.
(1) Immediately recognized gain. If gain on disposition of property does not qualify for installment or cost recovery treatment or if the transaction does qualify but the seller chooses not to use the installment method of accounting, the excess of the face amount of the evidence of indebtedness given the exchange for the property sold or otherwise disposed of together with the value of other consideration received by the seller over the seller's adjusted basis shall be recognized as gain in the year of the sale or disposition.
(2) Installment sales method. When a seller who is a cash basis taxpayer enters into an agreement for the sale of tangible personal property or real property under which agreement at least one payment is to be received in a taxable year following the year of sale, the seller may irrevocably elect to allocate the gain upon the transaction in equal proportion to each payment to be received under the following conditions:
(i) The sale was made on or after January 1, 1984.
(ii) The object of the transaction is not the lending of money or the rendition of services.
(iii) The taxpayer has not elected to exclude gains under subsection (g).
(3) Cost recovery method. When a seller who is a cash basis taxpayer enters into an agreement for the sale of intangible personal property under which agreement at least one payment is to be received in a taxable year following the year of sale, the seller shall use the cost recovery method of accounting if the note, contractual promise or other evidence of that obligation is not assignable.
(4) Repossessed property. When property is sold pursuant to a deferred payment contract, and the seller repossesses the property upon default of the buyer in a subsequent tax year, the seller shall account for the gain or loss by adjusting his basis in the property repossessed by the amount of gain previously reported on that sale.
(j) Determination of net gain or income. For purpose of determining net gains or income from the disposition of property, gain or loss shall be recognized on the sale, exchange or other disposition of obligations issued by the Commonwealth, a public authority, commission, board or other agency created by the Commonwealth, a political subdivision of this Commonwealth or a public authority created by the political subdivision or exempt from State taxation under the laws of the United States only with respect to obligations issued on or after February 1, 1994. Regardless of the obligation's date of issuance, gain or loss shall be recognized on the sale, exchange or other disposition of obligations issued by this Commonwealth, a publc authority, commission, board or other agency created by the Commonwealth, a political subdivision of the Commonwealth or a public authority created by the political subdivision or exempt from State taxation under the laws of the United States for one or more of the following purposes:
(1) Computing earnings and profits.
(2) Adjusting basis.
(3) Determining an individual's poverty income.
(k) Adjustments to basis.
(1) For taxable years beginning on or after January 1, 1993, the basis of a debt instrument in the hands of the holder shall be adjusted upward by the amount of unstated or imputed interest includible in the income of the holder and shall be adjusted downward, but not below zero, by the amount of any payment under the debt instrument other than a payment of stated interest.
(2) The basis of an obligation issued by the Commonwealth, a public authority, commission, board or other agency created by the Commonwealth, a political subdivision of this Commonwealth or a public authority created by the political subdivision or an obligation exempt from tax under the laws of the United States in the hands of the holder shall be adjusted upward by the amount of unstated or imputed interest that would have been includible in income but for its statutory exemption and shall be adjusted downward, but not below zero, by the amount of any payment under the debt instrument other than a payment of stated interest.
[Pa.B. Doc. No. 98-1650. Filed for public inspection October 9, 1998, 9:00 a.m.]
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