In the recently released Private Letter Ruling 201628002, the
IRS determined that taxpayers were entitled to partial gain
exclusion for the sale of their principal residence. Despite not
using the property as their principal residence for at least 2
years, the taxpayers were entitled to a partial exclusion because
the move was precipitated by unforeseen circumstances; namely, the
birth of a second child in the taxpayers' family.
The taxpayers were a married couple with one child. On Date 1, the
taxpayers purchased residence 1, a condominium with two bedrooms
and two baths (the "Property").
Subsequently, the taxpayer-wife gave birth to another child.
Accordingly, on Date 2, the taxpayers moved out of the Property and
into a new principal residence. On Date 3, the taxpayers sold the
Property. The taxpayers questioned whether the sale of the Property
was eligible for the gain exclusion as a sale of their principal
residence.
A married couple filing a joint return can exclude from income up
to $500,000 of gain attributable to the sale of their principal
residence. I.R.C. § 121(a), (b)(2). To qualify for the
gain exclusion, for at least two of the prior five years, the
taxpayer must have (a) owned the property and (b) used the property
as his or her principal residence. If, however, the
taxpayer's primary reason for the sale is the occurrence of
unforeseen circumstances, the taxpayer may be eligible for partial
gain exclusion. I.R.C. § 121(c). In determining whether
the taxpayer sold the property primarily due to unforeseen
circumstances, the IRS looks at: (1) whether the subject
property continued to be suitable for use as the taxpayer's
principal residence; (2) whether the impetus for the sale was not
reasonably foreseeable when the taxpayer acquired the property; and
(3) whether the impetus for the sale occurred while the taxpayer
was using the property as his or her principal residence. If the
taxpayer qualifies for the reduced exclusion, the amount of the
exclusion is determined using by multiplying the maximum exclusion
(here, $500,000) by a fraction intended to capture the amount of
time during the prior two years that the taxpayer used or owned the
property.
The IRS determined that the birth of the second child was an
unforeseen circumstance. Further, the primary reason for the
sale of the Property was the taxpayers' need for a larger
principal residence, necessitated by the unforeseen circumstances.
The Property was no longer suitable for the taxpayers'
residential needs. Accordingly, the IRS concluded that the
taxpayers were entitled to partial gain exclusion on their sale of
the Property.
Taxpayers should be aware of this ruling, which offers a generous
interpretation of the "unforeseen circumstances"
exception to the requirements for exclusion of gain on a
residential sale.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.