Nature of the Case
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Facts
On December 14, 1984, David A. Gates (P) purchased the Summit Road property for $150,000. The Summit Road property included an 880-square-foot two-story building with a studio on the second level and living quarters on the first level (original house). On August 12, 1989, P married Christine. Ps resided in the original house for a period of at least 2 years from August 1996 to August 1998. In 1996 Ps decided to enlarge and remodel the original house. Ps demolished the original house and constructed a new three-bedroom house (new house) on the property. 5 The new house complied with the building and permit requirements existing in 1999. Ps never resided in the new house. On April 7, 2000, they sold the new house for $1,100,000. The sale resulted in a $591,406 gain. Ps did not report as income any of the $591,406 capital gain generated. D mailed a notice of deficiency for 2000 that increased petitioners' income by $500,000 and explained that Ps had failed to establish that any of the gain on the sale of the Summit Road property was excludable under section 121. Ps sued seeking a redetermination of the deficiency.
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