Final answer:
A taxpayer must choose between utilizing § 121 gain exclusion or § 1033 involuntary conversion provisions when their principal residence is destroyed in a fire; they cannot use both concurrently. The statement is therefore True.
Step-by-step explanation:
A taxpayer whose principal residence is destroyed in a fire indeed faces a significant tax decision involving two distinct Internal Revenue Code sections: § 121, which relates to the exclusion of gain from the sale of a principal residence, and § 1033, which refers to the involuntary conversion of property and the subsequent postponement of gain.
Under § 121, a taxpayer may exclude up to $250,000 of gain ($500,000 if married filing jointly) from their income when they sell or exchange their principal residence, provided they have owned and used it as their principal residence for at least two out of the last five years prior to the sale.
On the other hand, § 1033 provides relief to taxpayers whose property is destroyed due to an event such as a fire—the involuntarily conversion. This section allows a taxpayer to postpone recognizing gain if they reinvest the insurance proceeds into property similar or related in service or use within a specified period.
It is true that a taxpayer must choose between these provisions since the Internal Revenue Service (IRS) does not allow the simultaneous application of both § 121 exclusion and the § 1033 deferral. Hence, the statement that a taxpayer whose principal residence is destroyed in a fire can use either the § 121 gain exclusion or the § 1033 involuntary conversion provisions, but not both, is True.