Hello and thank you for your question.
As you know, 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. For taxpayers
who fail to satisfy the ownership and use tests or the limit of one
sale every two years, §121(c) provides for a reduced maximum exclusion
if the primary reason for sale or exchange is a change in place of
employment, health, or unforeseen circumstances.
Almost everything there is to know about the "unforeseen
circumstances" exception is contained in the Treasury Decision that
accompanied the release of final regulations and the regulations
themselves, including 10 examples.
Here are quoted highlights of TD 9152 and the regulations:
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Section 121(c) provides that a taxpayer who fails to meet any of the
conditions by reason of a change in place of employment, health, or,
to the extent provided in regulations, unforeseen circumstances, may
be entitled to an exclusion in a reduced maximum amount.
For greater simplicity, the final regulations provide that, if a safe
harbor does not apply, the taxpayer may be eligible to claim a reduced
maximum exclusion if the taxpayer establishes, based on the facts and
circumstances, that the taxpayer?s primary reason for the sale or
exchange is achange in place of employment, health, or unforeseen
circumstances.
The final regulations state the definition of a sale or exchange by
reason of unforeseen circumstances as ?an event that the taxpayer
could not reasonably have anticipated? before purchasing and occupying
the residence. Additionally, the final regulations clarify that a sale
or exchange by reason of unforeseen circumstances (other than a sale
or exchange within a safe harbor) does not qualify for the reduced
maximum exclusion if the primary reason for the sale or exchange is a
preference for a different residence or an improvement in financial
circumstances. The final regulations provide examples illustrating the
application of the reduced maximum exclusion rules to situations
outside of the unforeseen circumstances safe harbors.
Specific event safe harbors. A sale or exchange is deemed to be by
reason of unforeseen circumstances if there is
(i) The involuntary conversion of the residence.
(ii) Natural or man-made disasters or acts of war or terrorism
resulting in a casualty to the residence (without regard to
deductibility under section 165(h)).
(iii) In the case of a qualified individual, A) Death; (B) The
cessation of employment as a result of which the qualified individual
is eligible for unemployment compensation; (C) A change in employment
or self-employment status that results in the taxpayer's inability to
pay housing costs and reasonable basic living expenses for the
taxpayer's household; (D) Divorce or legal separation under a decree
of divorce or separate maintenance; or (E) Multiple births resulting
from the same pregnancy.
The following examples illustrate these rules:
Example 1. In 2003 A buys a house in California. After A begins to use
the house as her principal residence, an earthquake causes damage to
A's house. A sells the house in 2004. The sale is within the safe
harbor of paragraph (e)(2)(ii) of this section and A is entitled to
claim a reduced maximum exclusion under section 121(c)(2).
Example 2. H works as a teacher and W works as a pilot. In 2003 H and
W buy a house that they use as their principal residence. Later that
year W is furloughed from her job for six months. H and W are unable
to pay their mortgage and reasonable basic living expenses for their
household during the period W is furloughed. H and W sell their house
in 2004. The sale is within the safe harbor of paragraph
(e)(2)(iii)(C) of this section and H and W are entitled to claim a
reduced maximum exclusion under section 121(c)(2).
Example 3. In 2003 H and W buy a two-bedroom condominium that they use
as their principal residence. In 2004 W gives birth to twins and H and
W sell their condominium and buy a four-bedroom house. The sale is
within the safe harbor of paragraph (e)(2)(iii)(E) of this section,
and H and W are entitled to claim a reduced maximum exclusion under
section 121(c)(2).
Example 4. In 2003 B buys a condominium in a high-rise building and
uses it as his principal residence. B?s monthly condominium fee is $X.
Three months after B moves into the condominium, the condominium
association replaces the building=s roof and heating system. Six
months later, B's monthly condominium fee doubles in order to pay for
the repairs. B sells the condominium in 2004 because he is unable to
afford the new condominium fee along with a monthly mortgage payment.
The safe harbors of paragraph (e)(2) of this section do not apply.
However, under the facts and circumstances, the primary reason for the
sale, the doubling of the condominium fee, is an unforeseen
circumstance because B could not reasonably haveanticipated that the
condominium fee would double at the time he purchased and occupied the
property. Consequently, the sale of the condominium is by reason of
unforeseen circumstances and B is entitled to claim a reduced maximum
exclusion under section 121(c)(2).
Example 5. In 2003 C buys a house that he uses as his principal
residence. The property is located on a heavily traveled road. C sells
the property in 2004 because C is disturbed by the traffic. The safe
harbors of paragraph (e)(2) of this section do not apply. Under the
facts and circumstances, the primary reason for the sale, the traffic,
is not an unforeseen circumstance because C could reasonably have
anticipated the traffic at the time he purchased and occupied the
house. Consequently, the sale of the house is not by reason of
unforeseen circumstances and C is not entitled to claim a reduced
maximum exclusion under section 121(c)(2).
Example 6. In 2003 D and her fiancé E buy a house and live in it as
their principal residence. In 2004 D and E cancel their wedding plans
and E moves out of the house. Because D cannot afford to make the
monthly mortgage payments alone, D and E sell the house in 2004. The
safe harbors of paragraph (e)(2)
of this section do not apply. However, under the facts and
circumstances, the primary reason for the sale, the broken engagement,
is an unforeseen circumstance because D and E could not reasonably
have anticipated the broken engagement at the time they purchased and
occupied the house. Consequently, the sale is by reason of unforeseen
circumstances and D and E are each entitled to claim a reduced maximum
exclusion under section 121(c)(2).
Example 7. In 2003 F buys a small condominium that she uses as her
principal residence. In 2005 F receives a promotion and a large
increase in her salary. F sells the condominium in 2004 and purchases
a house because she can now afford the house. The safe harbors of
paragraph (e)(2) of this section do not apply. Under the facts and
circumstances, the primary reason for the sale of the house, F?s
salary increase, is an improvement in F?s financial circumstances.
Under paragraph (e)(1) of this section, an improvement in financial
circumstances, even if the result of unforeseen circumstances, does
not qualify for the reduced maximum exclusion by reason of unforeseen
circumstances under section 121(c)(2).
Example 8. In April 2003 G buys a house that he uses as his principal
residence. G sells his house in October 2004 because the house has
greatly appreciated in value, mortgage rates have substantially
decreased, and G can afford a bigger house. The safe harbors of
paragraph (e)(2) of this section do not apply. Under the facts and
circumstances, the primary reasons for the sale of the house, the
changes in G?s house value and in the mortgage rates, are an
improvement in G?s financial circumstances. Under paragraph (e)(1) of
this section, an improvement in financial circumstances, even if the
result of unforeseen circumstances, does not qualify for thereduced
maximum exclusion by reason of unforeseen circumstances under section
121(c)(2).
Example 9. H works as a police officer for City X. In 2003 H buys a
condominium that he uses as his principal residence. In 2004 H is
assigned to City X?s K-9 unit and is required to care for the police
service dog at his home. Because H?s condominium association does not
permit H to have a dog in his condominium, in 2004 he sells the
condominium and buys a house. The safe harbors of paragraph (e)(2) of
this section do not apply. However, under the facts and
circumstances, the primary reason for the sale, H?s assignment to the
K-9 unit, is an unforeseen circumstance because H could not reasonably
have anticipated his assignment to the K-9 unit at the time he
purchased and occupied the condominium. Consequently, the sale of the
condominium is by reason of unforeseen circumstances and H is entitled
to claim a reducedmaximum exclusion under section 121(c)(2).
Example 10. In 2003, J buys a small house that she uses as her
principal residence. After J wins the lottery, she sells the small
house in 2004 and buys a bigger, more expensive house.The safe harbors
of paragraph (e)(2) of this section do not apply. Under the facts and
circumstances, the primary reason for the sale of the house, winning
the lottery, is an improvement in J?s financial circumstances. Under
paragraph (e)(1) of this section, an improvement in financial
circumstances, even if the result of unforeseen circumstances,does not
qualify for the reduced maximum exclusion under section 121(c)(2).(f)
Qualified individual.
T.D. 9152
http://ftp.irs.gov/pub/irs-regs/td_9152.pdf
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So, clearly the fire like the earthquake in Example 1 qualifies you
for the safe harbor and allows you to pro-rate the exclusion.
I have looked thoroughly, and except for an announcement that loss of
residence due to the 9/11 attacks qualifies for relief, there are no
other pertinent rulings and there is no case law.
As to the period of rehab, if anything it falls within the improved
circumstances described in the examples given above that do not
qualify.
So you will be able to pro-rate the period of your use against the
2-year standard, but you will lose the portion of the 250,000/500,000
relief corresponding to the time that you were not resident there.
You can read further commentary along these lines via Google search at
://www.google.com/search?hl=en&lr=&rls=GGLD%2CGGLD%3A2004-01%2CGGLD%3Aen&q=residence+%22Reduced+Maximum+Exclusion%22&btnG=Search
Search terms used:
residence "Reduced Maximum Exclusion"
Thanks again for letting us help. If you find any of the above
unclear, please request clarification. I would appreciate it if you
would hold off on rating my answer until I have a chance to respond.
Richard-ga |
