SECTION 4. APPLICATION

.01 In general . Taxpayers within the scope of this revenue procedure may apply both the exclusion of gain from the exchange of a principal residence under § 121 and the nonrecognition of gain from the exchange of like-kind properties under § 1031 to an exchange of property by applying the procedures set forth in this section 4.

.02 Computation of gain . (1) Application of § 121 before § 1031 . Section 121 must be applied to gain realized before applying § 1031.

(2) Application of § 1031 to gain attrib- utable to depreciation . Under § 121(d)(6), the § 121 exclusion does not apply to gain attributable to depreciation deductions for periods after May 6, 1997, claimed with respect to the business or investment portion of a residence. However, § 1031 may apply to such gain.

(3) Treatment of boot . In applying § 1031, cash or other non-like kind property (boot) received in exchange for property used in the taxpayer’s trade or business or held for investment (the relinquished business property), is taken into account only to the extent the boot exceeds the gain excluded under § 121 with respect to the relinquished business property.

.03 Computation of basis . In determining the basis of the property received in the exchange to be used in the taxpayer’s trade or business or held for investment (the replacement business property), any gain excluded under § 121 is treated as gain recognized by the taxpayer. Thus, under § 1031(d), the basis of the replacement business property is increased by any gain attributable to the relinquished business property that is excluded under § 121.