Vernoia, Enterline + Brewer, CPA LLC

babyThe IRS determined that a married couple could take advantage of the reduced maximum exclusion of gain from the sale of their home after the birth of their second child (LTR 201628002). Unforeseen circumstances were found to be the primary reason for the sale.

In general, a taxpayer may exclude up to $250,000 (or $500,000 if married filing jointly) of gain from the sale or exchange of property owned and used by the taxpayer as the principal residence for periods aggregating at least two out of the past five years, as determined by the date of the sale. In the case of an otherwise nonqualifying sale or exchange occurring by reason of a change in place of employment, health or other unforeseen circumstances, a partial exclusion of gain may be available under Code Sec. 121(c).

The taxpayers purchased a two-bedroom condominium at a time when they only had one child. The couple subsequently had another child, moved out of the condominium and sold it.

The IRS relied on a factor analysis in determining whether the facts and circumstances of the sale of the taxpayers’ home suggested that the primary reason for the sale was the occurrence of unforeseen circumstances. Reg. §1.121-3(e)(1) provides that a sale results from unforeseen circumstances if the primary reason for the sale is the occurrence of an event that the taxpayer could not reasonably have anticipated before purchasing and occupying the residence.

The IRS concluded that the birth of the couple’s second child marked the occurrence of an unforeseen circumstance that was the primary reason for the sale of the couple’s condominium. The IRS determined that the suitability of the condominium as their principal residence materially changed. Therefore, the gain on the sale of the condominium could be excluded under the reduced maximum exclusion of gain under Code Sec. 121(c).

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