David W. Randolph (Xavier University, Williams College of Business), "Unforeseen Circumstances" Exclusion From Gain on Sale of Home: Regulations and Private Letter Rulings Offer Examples of Situations the IRS Has Approved as Qualifying for Partial Exclusion of Gain (Journal of Accountancy):
Single taxpayers or those married filing separately generally can exclude up to $250,000 of the gain from the sale or exchange of a home ($500,000 for married taxpayers filing jointly). This exclusion may be taken once every two years if the taxpayers have owned and used the property as a principal residence for a period of (or periods totaling) at least two years during the five-year period ending on the date of the sale or exchange. Taxpayers who don’t meet these conditions can qualify for a reduced exclusion under § 121(c) if the sale or exchange is because of a change in place of employment, health or “unforeseen circumstances.” …
Unforeseen circumstances. Unforeseen circumstances are defined by Treas. Reg. § 1.121-3(e)(1) as events the taxpayer could not reasonably have anticipated before purchasing and occupying the residence. Specific-event safe harbors are provided in Treas. Reg. § 1.121-3(e)(2): involuntary conversion of the residence; disasters or acts of war or terrorism damaging the residence; or a qualified individual’s death, unemployment (if eligible for unemployment compensation), change in employment status that results in an inability to pay housing costs and basic living expenses, divorce or legal separation under a decree of divorce or separate maintenance, or a multiple birth. These, however, are hardly all the common life events that can result in the sale or exchange of a home, such as marriage, adoption or other circumstance that results in the addition of dependents to the family. Despite not being specified as safe harbor events, circumstances such as these and others may still qualify as unforeseen. Determining whether fact patterns exhibit the level of unforeseeability necessary to qualify as unforeseen circumstances requires taxpayers and practitioners to exercise their best judgment.
NONSPECIFIC EVENTS
The following summarizes the 15 letter rulings that were issued from Aug. 13, 2004 (the date final regulations were issued under IRC § 121), through August 2009 that have addressed whether given facts and circumstances qualify as unforeseen despite falling outside the specific-event safe harbors. In each case, the IRS found that unforeseen circumstances were present and granted the taxpayer partial gain exclusion relief under section 121(c); no unfavorable rulings were issued. The rulings can be broadly characterized as relating to (1) additional dependents arising out of marriage or other events, (2) environmental factors that detrimentally affect the quality of living in a particular locale and (3) job-related circumstances. Although the rulings may not be cited as precedent and do not establish a safe harbor of general applicability, they do provide a basis for understanding what circumstances the IRS is likely to consider unforeseen.
ADDITIONAL DEPENDENTS
Life events the Service has most frequently ruled upon are those taxpayers did not plan when they purchased a residence and that increased the number of dependents living under one roof. They include the addition of children via pregnancy, adoption or second marriage, and providing in-home care for a parent who became ill or disabled. Here are summaries of these rulings (in chronological order) and their circumstances:
Blended family moves to children’s school district. PLR 200601022. …
Adult child moves back in with parents. PLR 200601023. …
Bigger house for adoption. PLR 200613009. …
Caring for disabled parent. PLR 200626024. …
Pregnancy and end of relationship. PLR 200652041. …
Large blended family. PLR 200725018. …
Second child and home office. PLR 200745011. …
Blended family and schools. PLR 200826024. …
Marriage with visiting child. PLR 200841022. …
ENVIRONMENTAL FACTORS
The IRS has also granted taxpayers relief under section 121(c) in instances where crime or acts of violence or even noise detracts from the taxpayer’s ability to maintain a satisfactory quality of living in a particular location.
Assaults and threats. PLR 200601009. …
Robbery. PLR 200630004. …
Aircraft noise. PLR 200702032. …
Child assaulted on school bus. PLR 200820016. …
JOB-RELATED CIRCUMSTANCES
The IRS has also granted taxpayers relief under section 121(c) in at least two instances where circumstances changed as a result of the taxpayer’s occupation.
K-9 officer. PLR 200504012. …
Narcotics investigator threatened. PLR 200615011. …
