PLR 200601022: Growing family permits reduced home sale gain exclusion

Plain-English summary

A family moved out of a home because school transportation became difficult, but initially intended to return and rented it out. After another child was born, they concluded that the home was too small and sold it. The IRS ruled that the primary reason for the sale was an unforeseen circumstance, allowing a reduced maximum exclusion of gain under § 121(c) despite less than two years of qualifying ownership and use. The IRS did not decide whether the taxpayer and spouse had used the property as their principal residence.

Ruling snapshot

• Question: Does the family's change in circumstances permit a reduced exclusion for gain on the sale?
• Outcome: Approved for the reduced maximum exclusion, subject to the principal residence caveat.
• Key authorities: IRC § 121(c); Treas. Reg. §§ 1.121-3(b), 1.121-3T(e).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200601022
Third Party Communication: None
Release Date: 1/6/2006
Date of Communication: Not Applicable
Index Number: 121.00-00
Person To Contact:
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-------------------------, ID No. ------------
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Telephone Number:
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Refer Reply To:
CC:ITA:B04
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PLR-154081-04
Date:
September 30, 2005

Taxpayer = ------------------------------------------- Spouse = ------------------------------------------ Date 1 = --------------------------- Date 2 = ---------------- Date 3 = -------------- Date 4 = ---------------------- Date 5 = ------------------ Date 6 = ------------------- House 1 = ----------------------------------- House 2 = ------------------------------------- x= ----------

Dear --------------:

This responds to your letter dated October 7, 2004, requesting a ruling on whether you are eligible to exclude gain from the sale of residence under § 121(c) of the Internal Revenue Code.

FACTS:

On Date 1, Taxpayer purchased House 1. Taxpayer and Spouse were married on Date

2. House 1 was located outside the school district of Spouse’s children. In order for the
   children to attend the same schools as before their move to House 1, they had to provide their own transportation. Until the end of the school year, Spouse’s older child was able to drive the children to school but after her graduation on Date 3 she was no longer able to provide transportation. On Date 4, the family moved into House 2, which was located in the school district of Spouse’s child.

Taxpayer represents that they intended to return to House 1 after Spouse’s younger child graduated from school in x. Because of their intent to return, Taxpayer rented out House 1 until Date 5. After the family moved to House 2, Taxpayer and Spouse had a
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child and represent that House 1 was no longer large enough for their family. Accordingly, House 1 was sold on Date 6.

LAW AND ANALYSIS:

Section 121(a) provides that a taxpayer's gross income will not include gain from the sale or exchange of property if, during the five-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating two years or more. The full exclusion is available only once every two years.

Section 121(b) provides that the maximum exclusion amount is $500,000 if (1) a husband and wife file a joint return for the year of the sale, (2) both spouses meet the 2- year use test, (3) at least one of the spouses meets the 2-year ownership test, and (4) neither spouse used the section 121 exclusion during the last two years.

Section 121(c) provides for a reduced maximum exclusion for taxpayers who fail to satisfy the ownership and use tests or the limit of one sale every two years if the primary reason for sale or exchange is a change in place of employment, health, or unforeseen circumstances.

A sale is by reason of unforeseen circumstances if the primary reason for the sale is the occurrence of an event that the taxpayer does not anticipate before purchasing and occupying the residence. A taxpayer's primary reason for the sale or exchange is deemed to be unforeseen circumstances if one of the safe harbor events, such as involuntary conversion of the residence, death, or divorce, occurs during the period of the taxpayer's ownership and use of the residence as the taxpayer's principal residence. In addition, the Commissioner may designate other events or situations as unforeseen circumstances in published guidance of general applicability or in a ruling directed to a specific taxpayer. See § 1.121-3T(e) of the Income Tax Regulations.

Section 1.121-3(b) provides that if a safe harbor does not apply, a sale is by reason of unforeseen circumstances only if the primary reason for the sale is unforeseen circumstances. Factors that may be relevant in determining the taxpayer’s primary reason for the sale include (but are not limited to) the extent to which (1) the sale and the circumstances giving rise to the sale are proximate in time; (2) the suitability of the property as the taxpayer’s principal residence materially changes; (3) the taxpayer’s financial ability to maintain the property is materially impaired; (4) the taxpayer uses the property as the taxpayer’s residence during the period of ownership of the property; (5) the circumstances giving rise to the sale are not reasonably foreseeable when the taxpayer begins using the property as the taxpayer’s principal residence; and (6) the circumstances 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.
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The reduced maximum exclusion is computed by multiplying the maximum dollar limitation of $ 250,000 ($ 500,000 for certain joint filers) 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 or exchange, (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 exchange, 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 current sale or exchange. 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).

Based on the facts, representations, and the relevant law as set forth above, we conclude that your primary reason for the sale of House 1 was an unforeseen circumstance. Consequently, the sale of House 1, which you owned and used as your principal residence for less than two of the preceding five years, will allow you to exclude gain up to the reduced maximum exclusion amount under § 121(c).

CAVEATS:

A copy of this letter must be attached to any income tax return to which it is relevant. We enclose a copy of the letter for this purpose. Also enclosed is a copy of the letter ruling showing the deletions proposed to be made in the letter when it is disclosed under ' 6110.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter. In addition, no opinion is expressed or implied as to whether Taxpayer and Spouse have used House 1 as their principal residence.

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

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to the authorized representative.

Sincerely,

George F. Wright
Assistant Branch Chief, Branch 4
Office of Associate Chief Counsel
(Income Tax & Accounting)