PLR 200841022: Expanded family qualifies homeowner for a reduced gain exclusion

Plain-English summary

A homeowner sold his residence before meeting Section 121's two-year use requirement. After buying that home, he married a partner with two children and also needed space for a child with whom he had a longstanding father-daughter relationship. The first home had three small bedrooms and a small office, while the new home could suitably accommodate the expanded family and the homeowner's work. The IRS found that the home's loss of suitability for the larger family was an unforeseen circumstance and the primary reason for the sale. The homeowner therefore could use Section 121(c)'s reduced maximum exclusion for the gain.

Ruling snapshot

• Question: Does the need to accommodate an expanded family permit a reduced exclusion of gain on the early home sale?
• Outcome: Approved. The family change was an unforeseen circumstance that qualified the sale for the reduced maximum exclusion.
• Key authorities: IRC § 121(a), (b), (c); Treas. Reg. § 1.121-3(b), (e).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200841022
Third Party Communication: None
Release Date: 10/10/2008
Date of Communication: Not Applicable
Person To Contact:
Index Number: 121.00-00
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Telephone Number:
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Refer Reply To:
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CC:ITA:4
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PLR-117569-08
Date:
July 07, 2008

TY: -------

LEGEND

Taxpayer = ----------------------
B = ---------------------
C = ---------
Residence 1 = --------------------------------
-------------------------------------------------------- Residence 2 = -----------------------------------
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Date 1 = --------------
Date 2 = -------
Date 3 = ---------------------
Date 4 = -------------
Date 5 = --------------------
Date 6 = -------------
Date 7 = --------------
Date 8 = ------------------

Dear ------------------

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).

Facts

On Date 1, Taxpayer purchased and began residing in Residence 1. Between Dates 2 and Dates 3, Taxpayer did not reside in Residence 1. On Date 3, Taxpayer moved back to Residence 1. Taxpayer began dating B on Date 4, became engaged to B on
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Date 5, and married B on Date 8. On Date 6, Taxpayer and B purchased Residence 2. On Date 7, Taxpayer sold Residence 1.

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.

Law and Analysis

Section 121(a) provides that gain from the sale or exchange of property is not included in gross income if, during the 5-year period ending on the date of the sale or exchange, the taxpayer has owned and used the property as the taxpayer’s principal residence for periods aggregating 2 years or more.

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 circumstances.

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 circumstances of a sale will determine whether the primary reason for the sale is the occurrence of unforeseen circumstances. 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 circumstances giving rise to the sale are not reasonably foreseeable when the taxpayer begins using the property as the
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taxpayer’s principal residence; and (3) 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.

Section 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. Section 1.121-3(e)(3) states that the Commissioner may issue rulings addressed to specific taxpayers identifying events or situations as unforeseen circumstances 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 circumstances. 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 circumstances 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). Caveats

Except as expressly stated, we provide no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter.

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.

Sincerely,

Donna Welsh
Senior Technician Reviewer, Branch 4
(Income Tax & Accounting)