You might be surprised what qualifies as an unforeseen circumstance for the partial exclusion of gain on the sale of a personal residence. Under this special rule, taxpayers are allowed to exclude gain up to a reduced maximum exclusion amount under Section 121(c) if  the sale is due to a change in place of employment, health, or unforeseen circumstances even though it was used for less than two of the five preceding years as the personal residence.

Reg. 1.121-3 lists specific situations that automatically qualify as unforeseen circumstances, and also allows the IRS to “issue rulings addressed to specific taxpayers identifying other events or situations as unforeseen.”

Here are the situations in five recent letter rulings that the IRS agreed were unforeseen: (1) sale by marrying couple to house children from prior marriages, (2) proceeds received in settlement of suit against sellers and realtors for diminished value due to undisclosed airport noise, (3) pregnancy of an individual sharing house, (4) sale by victim of crime, and (5) the need for bigger house to care for ill mother.

There are many other rulings out there on what qualifies as unforeseen circumstances. Increased awareness of these rulings will allow you to identify and alert your clients when their particular situation, although not in the safe harbors of the regulations, still might qualify for a partial exclusion on gain on the sale of a personal residence. I think with this awareness you and your applicable clients will welcome, and benefit from, how liberal IRS is.


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