Neighbors' hostility allowed reduced exclusion on residence sale gain.

• Author: Puckett, Mark D.

Sec. 121(c) allows a partial exclusion of gain from a sale of a principal residence for taxpayers who do not qualify for the maximum exclusion under Sec. 121. In Letter Ruling 200403049, the taxpayers' circumstances were held to be "unforeseen," thus entitling them to the reduced gain exclusion. According to Temp. Regs. Sec. 1.1213T(e)(2)(iv), the IRS will from time to time publish general guidance (or rulings directed to specific taxpayers), on what constitutes "unforeseen circumstances." which could qualify taxpayers for a reduced exclusion if they fail to meet Sec. 121's requirements. Letter Ruling 200403049 is a recent example of such specific guidance.

Background

After May 6, 1997, Sec. 121 has operated to exclude from gross income gain from the sale of a qualifying personal residence, not to exceed $250,000 (for single filers) or $500,000 (for joint filers). The maximum is unavailable, however, to taxpayers who fail to meet Sec. 121's ownership, use and frequency-of sale-requirements. (For a discussion, see Dilley, "Tax Planning for the Sale of a Principal Residence," TTA, January 2004 (Part I), p. 30, and February 2004 (Part II), p. 90.) Under Sec. 121 (c), taxpayers failing to qualify for the maximum exclusion may qualify, for a reduced exclusion.

According to Temp. Regs. Sec. 1.121-3T(b), "... for a taxpayer to claim a reduced maximum exclusion under section 121(c), tire sale or exchange must be by reason of a change in place of employment, health, or unforeseen circumstances ..." (Emphasis added.) The regulations further set forth that whether the requirements are met depends on "all the facts and circumstances." Under Temp. Regs. Sec. 1.121-3T(b)(5), one key requirement to qualify for the unforeseen circumstances exception is that the circumstances that gave rise to the residence sale or exchange were not reasonably foreseeable when the taxpayer began using the property as a personal residence.

Facts

In Letter Ruling 200403049, the taxpayers owned and resided in a home (H1).While residing there...