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Personal residence gain exclusion: unforeseen circumstances safe harbors.

Under Sec. 121(a) and (b), taxpayers can exclude up to $250,000 of the gain on the sale or exchange of their principal residence ($500,000 for certain joint returns). However, they must have owned and used the property as a principal residence for at least two of the previous five years ending on the sale or exchange date. Also, under Sec. 121(b)(3), taxpayers can use this exclusion only if they have not used it in the last two years.


On Aug. 13, 2004, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws.  issued final regulations on (1) the gain exclusions and (2) Sec. 121(c)'s special rules for taxpayers who do not meet the two-out-of-five-year test or the two-year limit. Under the latter provision, taxpayers may still qualify for a reduced maximum exclusion if the sale or exchange was due to a change in place of employment, health or unforeseen circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact.
     2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or
; the regulations provide safe harbors Safe Harbor

1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated.

2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive.
 to qualify. If a safe harbor is not met, taxpayers might still be able to qualify if they can establish that the sale was "primarily related" to the aforementioned a·fore·men·tioned  
Mentioned previously.

The one or ones mentioned previously.


mentioned before

Adj. 1.
 reasons, under Regs. Sec. 1.121-3(b).

Safe Harbors

Employment: According to according to
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

 Regs. Sec. 1.121-3(c)(1) and (2), a sale or exchange is by reason of a change in place of employment if it occurs when the taxpayer owns and uses the property as a principal residence, and the qualified individual's new place of employment is at least 50 miles farther from the residence sold or exchanged than was the former place of employment. If there was no former place of employment, the distance between the qualified individual's new place of employment and the residence sold or exchanged must be at least 50 miles. Regs. Sec. 1.121-3(c)(3) defines "employment" as commencement with a new employer, continuation with the same employer or, for self-employed taxpayers, commencement or continuation of self-employment. Regs. Sec. 1.121-3(f) provides that a qualified individual is a:

1. Taxpayer;

2. Taxpayer's spouse;

3. Co-owner of the residence;

4. Person whose principal place of abode One's home; habitation; place of dwelling; or residence. Ordinarily means "domicile." Living place impermanent in character. The place where a person dwells. Residence of a legal voter. Fixed place of residence for the time being.  is in the same household as the taxpayer; or

5. Person bearing a relationship specified in Sec. 152(a)(1)-(8) (without regard to qualification as a dependent) to a person described in items 1-4 above, or a descendant of the taxpayer's grandparent.

Example 1: A is employed by T at T's South Bend South Bend, city (1990 pop. 105,511), seat of St. Joseph co., N Ind., on the great south bend of the St. Joseph River, in a farming and mint-growing region; inc. as a city 1865. , IN office. She purchased a house in June 2002 that is 35 miles from there. In May 2003, A began a temporary assignment at T's Oakbrook, IL office, which is 75 miles from her house, and moved out of the house. In June 2005, A was assigned to work in T's Sydney, Australia office. She sold her house in August 2005 as a result of the new assignment and moved to Sydney.

The sale of the house is not within the safe harbor by reason of the change in place of employment from South Bend to Oakbrook, because the Oakbrook office is not 50 miles farther from A's house than was the South Bend office. Further, selling the house to move to Sydney is not within the safe harbor, because A had not been living in her principal residence when she moved to Sydney. However, A is still entitled en·ti·tle  
tr.v. en·ti·tled, en·ti·tling, en·ti·tles
1. To give a name or title to.

2. To furnish with a right or claim to something:
 to claim a reduced maximum exclusion under Sec. 121(c)(2) because, under the facts and circumstances, the primary reason for the sale is the change in her place of employment.

Health: Regs. Sec. 1.121-3(d) provides that a sale or exchange is by reason of health if it will allow a qualified individual to obtain, provide or facilitate the diagnosis, cure, mitigation MITIGATION. To make less rigorous or penal.
     2. Crimes are frequently committed under circumstances which are not justifiable nor excusable, yet they show that the offender has been greatly tempted; as, for example, when a starving man steals bread to satisfy
 or treatment of disease, illness or injury, or to obtain or provide medical or personal care for a qualified individual suffering from a disease, illness or injury. While a sale or exchange merely for general health or well-being does not qualify, Regs. Sec. 1.121-3(d)(2) states that a sale or exchange resulting from a physician's recommendation (as defined in Sec. 213(d)(4)) does qualify.

Example 2: D and E purchased a home in 2004 to use as a principal residence. Their daughter, F, suffers from a chronic illness that requires routine medical attention. Later that year, F began a new medical treatment at a hospital 150 miles away from home. In 2005, D and E sell their home so that they can be closer to the hospital to facilitate F's treatment. Because, under the facts and circumstances, the primary reason for the sale is to support the treatment of F's illness, D and E can claim a reduced maximum exclusion under Sec. 121(c)(2).

Unforeseen circumstances: Regs. Sec. 1.121-3(e)(1) allows a reduced exclusion if the primary reason for the sale or exchange is the occurrence of unforeseen circumstances, defined as an event that the taxpayer could not reasonably have anticipated before purchasing and occupying a residence. There are specific-event safe harbors that must occur during the period the taxpayer owned and used the residence as a principal residence, under Regs. Sec. 1.121-3(e)(2):

1. Involuntary involuntary adj. or adv. without intent, will, or choice. Participation in a crime is involuntary if forced by immediate threat to life or health of oneself or one's loved ones, and will result in dismissal or acquittal.

 conversion of the residence;

2. A natural or man-made disaster man-made disaster Technological disaster Public health An event in which a significant number of people are injured or die as a result of human devices or activities, unrelated to conflicts, and attributed to operator error–eg, Exxon Valdez , or act of War or terrorism resulting in a casualty to the residence.

3. Any of the following occurring to a qualified individual:

* Death;

* Termination of employment "Fired" and "Firing" redirect here. For other uses, see Fired (disambiguation) and Firing (disambiguation).

“Gross misconduct” redirects here. For the ice hockey term, see Penalty (ice hockey).
 for which the qualified individual is eligible for unemployment compensation;

* Termination of employment resulting in the inability to pay living and housing costs;

* Divorce or legal separation under a decree decree, in law, decision of a suit in a court of equity. It is the counterpart in equity of the judgment in a court of law, although in those jurisdictions where law and equity have merged, judgment is sometimes used to include both.  of divorce or separate maintenance; or

* Multiple births from the same pregnancy.

Although receiving commentary on the issue, the IRS chose not to include marriage, bankruptcy bankruptcy, in law, settlement of the liabilities of a person or organization wholly or partially unable to meet financial obligations. The purposes are to distribute, through a court-appointed receiver, the bankrupt's assets equitably among creditors and, in most  of the taxpayer's employer (not resulting in the loss of the taxpayer's employment) and adoption, as specific-event sate harbors under the unforeseen circumstances exception. Gain also cannot be excluded or limited if the taxpayer's primary reason for selling the residence is a preference for a different residence or improvement in financial circumstances.


Under Regs. Sec. 1.121-3(g)(1), computation Computation is a general term for any type of information processing that can be represented mathematically. This includes phenomena ranging from simple calculations to human thinking.  of the reduced maximum exclusion is calculated by multiplying mul·ti·ply 1  
v. mul·ti·plied, mul·ti·ply·ing, mul·ti·plies
1. To increase the amount, number, or degree of.

2. Mathematics To perform multiplication on.
 the maximum dollar limit ($250,000 or $500,000) by a fraction. The numerator numerator

the upper part of a fraction.

numerator relationship
see additive genetic relationship.

numerator Epidemiology The upper part of a fraction
 of the fraction is the shortest of the following: 1. The period that the taxpayer owned the property during the five-year period ending on the sale or exchange date;

2. The period that the taxpayer used the property as a principal residence during the five-year period ending on the sale or exchange date; or

3. The period between the date of a prior sale or exchange of property for which the taxpayer excluded gain under Sec. 121, and the current sale or exchange date.

The numerator of the fraction may be expressed in days or months. The denominator denominator

the bottom line of a fraction; the base population on which population rates such as birth and death rates are calculated.

 is 730 days or 24 months (depending on the measure of time used in the numerator).

Example 3: A single taxpayer, C, purchased a home in January 2004 and sold it in December 2004 because of a change in employment. C has not excluded gain under Sec. 121 on a prior sale or exchange of property in the last two years. Thus, C is eligible to exclude $125,000 of the gain from a sale or exchange of the home (12/24 x $250,000).


The final regulations on the sale or exchange of a principal residence will allow taxpayers a reduced exclusion amount if certain requirements are met.

From Nick HF Hildabridle, and Sami D.T. Miller, South Bend, IN
COPYRIGHT 2005 American Institute of CPA's
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Author:Miller, Sami D.T.
Publication:The Tax Adviser
Date:Sep 1, 2005
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