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Partial Exclusion for Home Sellers, Part 5: More Private Letter Rulings

Jul 11th 2016
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The law authorizes an exclusion of as much as $500,000 for home sales. But the IRS bars an exclusion for sellers who fail the ownership and use tests or used the exclusion in the sale of another home within the previous two years that end on the date of the current sale.

Sellers still might be eligible for a partial or prorated exclusion when the primary reason for the sale is because of any one of the following three exceptions that are liberally defined by the IRS:

  • Change in place of employment.
  • Health problems.
  • Unforeseen circumstances that couldn’t “reasonably have been anticipated before buying and occupying the home.”

Previous articles in this series covered partial exclusions for sales caused by each of the three exceptions. A fourth article discussed several private letter rulings that approved reduced exclusions.

The four additional private letter rulings discussed in this final article show that the IRS can be persuaded that unforeseen circumstances justify reduced exclusions. All four concluded that the events motivating the sales couldn’t be foreseen. Therefore, the sellers could claim partial exclusions.

Home sold to facilitate complicated adoption. After a married couple moved into a three-bedroom home with their three sons, they decided to adopt a foreign child, a girl. But there were complications. One snag was that state law mandated that there be a separate bedroom for the girl. Another was that the state required that the couple’s circumstances not change during the adoption process while they underwent a home study inspection and review. One of the spouses was serving in the military and expecting a transfer. They’d have to restart the process if they moved before the state completed its inspections and reviews. As the couple feared flunking the deadline for the adoption process, they sold their home in order to rent a residence with an additional room for the adopted child.

Letter Ruling 200613009 doesn’t spell out a rationale for allowing a partial exclusion. But the ruling’s careful recitation of the particular facts does give some hint of the agency’s approach. Here, a third party (the adoption agency) intervened, suggesting that the events motivating the sale weren’t under the couple’s control.

Personal safety in jeopardy. Letter Ruling 200601009 OK’d a partial exclusion for a couple who were initially clueless that they had opted to acquire a new home in a high-crime area. They sold it after one of them was severely assaulted by several neighbors, requiring a trip to a hospital emergency room, and their son was assaulted and threatened.

Letter Ruling 200630004 did the same for a man who was held up at gunpoint while leaving his home and forced to drive an assailant for about an hour to several locations, including ATM machines. Not as an aside, the ruling noted that “the assailant was agitated, unpredictable, and made repeated threats” on the man’s life. Unsurprisingly, the IRS concluded the traumatic and violent nature of the crime wasn’t foreseeable.

Fear of criminal retaliation. Similarly, Letter Ruling 200615011 allowed a partial exclusion for a police officer who arrested an alleged drug dealer in a highly publicized anti-drug sting. Soon after, the police department learned that the drug dealer’s associates had discovered the officer’s address and planned to kill him. In response, the police provided the officer and his family with round-the-clock protection. Nonetheless, the officer was afraid for his family’s safety. They vacated the residence and subsequently sold it. Their genuine fear for their physical safety wasn’t foreseeable.

Early move from seniors-only community. Letter Ruling 20601023 approved a reduced exclusion for a couple who selected a house in a retirement community that had minimum age requirements for residents. Shortly after they moved in, their adult daughter lost her job and was in the process of getting a divorce. The daughter and her child wanted to move in with the couple but were unable to do so because of the age requirements. The couple sold their home and relocated to a new home in which their daughter and grandchild now also reside.

Additionalarticles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 110 and counting).

Stay competitive with your fellow accountants who turn to the articles when, say, they correspond with clients or they want to show clients how to nimbly sidestep pitfalls while capitalizing on opportunities to diminish, delay, or deep-six payments of sizable amounts that would otherwise swell IRS coffers.

Also be mindful of the articles when you strive to build name recognition, a goal attainable only by choosing and implementing strategies that set you apart from ferocious competition. Use the articles to prepare talks to audiences, such as business owners, investors, and retirees.

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By JJ Collins
Jul 12th 2016 14:55

Well written, clearly expressed, helpful! Thanks.

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