Reduced Exclusion Available To Couple Who Sold Residence After Birth Of Second Child

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, the IRS has determined. Unforeseen circumstances were the primary reason for the sale and the suitability of the residence as the taxpayers’ principal residence materially changed when the couple had a second child.

For Sale

Take away. A taxpayer may exclude from gross income up to $250,000 (or $500,000 if married filing jointly) of the gain from the sale or exchange of property that has been owned and used as the taxpayer’s principal residence for periods aggregating at least two out of the five years ending on the date of the sale or exchange. A partial exclusion of gain may be available in the case of an otherwise nonqualifying sale or exchange occurring by reason of a change in place of employment, health or, to the extent prescribed by regulations, other unforeseen circumstances.

Background

The taxpayers purchased a two-bedroom condominium. At that time, the couple had one child. The child’s bedroom also served as the husband’s home office as well as a guest room. The couple subsequently had another child. The couple then moved out of the condominium and sold it.

IRS analysis

The IRS first noted that all the facts and circumstances of a sale determine if the primary reason for the sale is the occurrence of unforeseen circumstances. Factors include the suitability of the property as the taxpayer’s residence materially changes. Reg. §1.121-3(e)(1) provides that a sale is by reason of 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.

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

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