HOME SELLER MAY EXCLUDE GAIN UNDER UNFORESEEN CIRc*msTANCES EXCEPTION. (2024)

Third Party Communication: None

This letter responds to your request for a ruling under section 121(c) of the Internal Revenue Code. Specifically, you requested a ruling that the gain on the sale of Residence 1 may be excluded from gross income under the reduced maximum exclusion in section 121(c).

B has 2 children, a boy and a girl. Taxpayer has a longstanding father-daughter relationship with C. After Taxpayer moved back to Residence 1, C regularly visited Taxpayer on weekends and school holidays.

Taxpayer works from home. Residence 1 had a small office, 3 small bedrooms, and 2 bathrooms. Residence 2 has 4 bedrooms, 2 full baths, 2 half baths, and an office for Taxpayer. Residence 2 allows Taxpayer to suitably accommodate his family, which includes children of the opposite sex and different ages.

Section 121(b)(1) states the general rule for the maximum exclusion of gain. Section 121(b)(3) provides that subsection (a) shall not apply to any sale if, during the 2-year period ending on the date of the sale, there was any other sale or exchange by the taxpayer to which subsection (a) applied.

Section 121(c) provides for a reduced maximum exclusion when a taxpayer fails to satisfy the ownership and use requirements of subsection (a) if the primary reason for the sale is the occurrence of unforeseen circ*mstances.

The reduced maximum exclusion is computed by multiplying the applicable maximum exclusion by a fraction. The numerator of the fraction is the shortest of the following periods: (1) the period of time that the taxpayer owned the property during the 5-year period ending on the date of the sale; (2) the period of time that the taxpayer used the property as the taxpayer's principal residence during the 5-year period ending on the date of the sale; or (3) the period of time between the date of a prior sale or exchange of property for which the taxpayer excluded gain under section 121 and the date of the recent sale. The numerator of the fraction may be expressed in days or months. The denominator of the fraction is 730 days or 24 months (depending on the measure of time used in the numerator).

Section 1.121-3(b) of the Income Tax Regulations provides that all the facts and circ*mstances of a sale will determine whether the primary reason for the sale is the occurrence of unforeseen circ*mstances. Factors that may be relevant in determining the primary reason for a sale include the following: (1) the suitability of the property as the taxpayer's residence materially changes; (2) the circ*mstances giving rise to the sale are not reasonably foreseeable when the taxpayer begins using the property as the taxpayer's principal residence; and (3) the circ*mstances giving rise to the sale occur during the period of the taxpayer's ownership and use of the property as the taxpayer's principal residence. Section 1.121-3(e)(1) provides that a sale is by reason of unforeseen circ*mstances 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.

Section 1.121-3(e)(3) states that the Commissioner may issue rulings addressed to specific taxpayers identifying events or situations as unforeseen circ*mstances with regard to those taxpayers.

Based on the facts, representations, and the relevant law, we conclude that the primary reason for the sale of Residence 1 was the occurrence of unforeseen circ*mstances. The suitability of Residence 1 as Taxpayer's principal residence materially changed with the need to accommodate an expanded family. The occurrence of these unforeseen circ*mstances was the primary reason for the sale of Residence 1 by Taxpayer.

Accordingly, the gain on the sale of Residence 1, which Taxpayer used as a principal residence for less than 2 of the 5 years preceding the sale, may be excluded under the reduced maximum exclusion of gain in section 121(c).

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, a taxpayer filing a return electronically may satisfy this requirement by attaching a statement to the return that provides the date and control number of the letter ruling.

The ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by the taxpayer. While this office has not verified any of the material submitted in support of the request for a ruling, it is subject to verification on examination.