September 11 Victims, Spouses Receive Tax Break

In the past year, Congress and the Internal Revenue Service have issued many tax rulings that are designed to ease the tax and administrative burdens on families of victims of the September 11, 2001 terrorist attacks. The latest of those rulings was issued last week.

Typically taxpayers who sell a personal residence within two years of a previous such sale are barred from taking the tax exclusion that applies to the gain on the sale. According to IRS Notice 2002-60, taxpayers who lost a spouse or a job in the September 11 attacks will be able to forego the two-year waiting period and take at least a partial exclusion on the gain on the sale of a personal residence.

Eligible taxpayers are those whose spouse or co-homeowner was killed in the attacks, those whose primary residence was damaged in the attacks, and those who lost their job or are unable to afford living expenses as a result of a job change related to the attacks.

The amount that can be excluded is a proportion of the normal exclusion amount of $500,000 for married couples filing jointly or $250,000 for other taxpayers. The proportion is calculated by multiplying the exclusion amount by the percent of time that the house was occupied during the two-year period extending from the date of purchase to the date of sale. For example, a taxpayer who owned and occupied the house for 10 months of the two-year period would be able to exclude gain up to 10/24ths of the maximum exclusion amount.

The exclusion is retroactive to the 2001 tax year, so taxpayers who already filed their 2001 tax return and who qualify for the exclusion may amend their 2001 tax return to take advantage of this new ruling. Treasury regulation will be issued soon to provide more specific guidance for the exclusion.

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