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Post Date:  8/30/2016
Last Updated:  8/30/2016

Summary
Cross References
- IRC §121
- Ltr. Rul. 201628002 (July 8, 2016)

Taxpayers can exclude up to $250,000 ($500,000 MFJ) of gain on the sale of a home if all three of the following are satisfied:
1) The taxpayer owned the home for at least two years during the 5-year period ending on the date of sale,
2) The taxpayer used the home as a principal residence for at least two years during the 5-year period ending on the date of sale, and
3) The taxpayer did not exclude gain from the sale of another home during the 2-year period ending on the date of sale.

Reduced exclusion. If the taxpayer does not meet the 2-year ownership and use tests, or has already excluded gain from the sale of another home during the 2-year period prior to the sale of a current home, the taxpayer may qualify for a reduced exclusion if the primary reason for the sale is due to:
1) A change in place of employment,
2) Health reasons,
3) Unforeseen circumstances.

Examples of unforeseen circumstances that may qualify for a reduced exclusion include:
- Involuntary conversion of home.
- Natural or man-made disasters, acts of war, or terrorism.
- Death.
- Unemployment.
- Change of employment resulting in an inability to pay reasonable basic living expenses.
- Divorce or legal separation.
- Multiple births resulting from the same pregnancy.
- Any other event the IRS determines to be an unforeseen circumstance.

Letter ruling 201628002. In a recent IRS Letter Ruling, the taxpayers were married and had one child when they purchased their two bedroom condominium. One bedroom was used as the child’s bedroom, the husband’s office in home, and as a guest room. After the purchase of this residence, the wife became pregnant and gave birth to a second child. The taxpayers sold their residence so that they could move to a larger home to accommodate their growing family.

The IRS concluded that the occurrence of unforeseen circumstances was the primary reason for the sale and that the suitability of their residence as a principal residence materially changed. Accordingly, the gain on the sale of the residence, which the taxpayers owned and used as a principal residence for less than two of the preceding five years, qualified for the reduced maximum exclusion under IRC section 121(c).

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