Academic journal article Journal of Accountancy

Neighbors' Hostility Allowed Partial Gain Exclusion on Residence Sale: The IRS Offers Guidance on "Unforeseen Circumstances"

Academic journal article Journal of Accountancy

Neighbors' Hostility Allowed Partial Gain Exclusion on Residence Sale: The IRS Offers Guidance on "Unforeseen Circumstances"

Article excerpt

IRC section 121(c) allows a partial exclusion of gain from the sale of a principal residence for taxpayers who fail to meet the ownership, use and frequency-of sale tests to qualify for the maximum exclusion under section 121(b) ($250,000 if single; $500,000 if married filing jointly). The IRS recently offered guidance on qualifying For the reduced exclusion, of which CPAs should be aware.

BACKGROUND

Temporary regulations section 1.121-3T(b) states that, for a taxpayer to claim a reduced maximum exclusion under section 121 (c), the sale or exchange of the taxpayer's residence must be due to a change in place of employment or in health or due to unforeseen circumstances, which depend on the facts and circumstances. One key requirement to qualify for the "unforeseen circumstances" exception is that the circumstances which gave rise to the sale or exchange of the residence must not have been reasonably foreseeable when the taxpayer began using the property as a personal residence.

Under temporary regulations section 1.121-3T(c)(2)(iv), the IRS is authorized, from time to time, to provide guidance on "unforeseen circumstances." It now has done so.

FACTS

In letter ruling 200403049, the taxpayers, husband and wife, owned and resided in a home (House 1). While residing there, another family member, A, committed a crime; this criminal was placed on probation and required to spend one year at a rehabilitation facility. During this period the couple relocated to a different neighborhood, sold House 1 and purchased a replacement residence (House 2). …

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