Blended Family an “Unforeseen Circumstance” for Home Sale


The IRS said a marriage that resulted in a large, combined new ­family was an “unforeseen circumstance” provided for in IRC § 121(c)(2)(B) that allowed a taxpayer to benefit from the capital gain exclusion on the sale of his principal residence. Letter Ruling 200725018 said the taxpayer could take advantage of the exclusion even though he owned the residence for less than two years.

Normally, a taxpayer must reside in a home as a principal residence for at least two of the previous five years before taking advantage of the capital gains exclusion of IRC § 121(a) on the sale of the home. A taxpayer may exclude up to $250,000 of gain; married taxpayers filing a joint return may exclude up to $500,000 of gain if they meet the conditions of section 121(b)(2).

The ruling involved a taxpayer called “Bill,” who has two children. He married “Andrea,” who has three children. Bill and Andrea each sold their principal residences so they could buy a larger home to accommodate the larger combined family. Bill owned his residence for less than two years.

The IRS said that under Treas. Reg. § 1.121-3(e)(1) the marriage and combining of families was an event the taxpayer could not reasonably have anticipated before buying his old residence. The event also altered “the suitability of the property as the taxpayer’s principal residence” under Treas. Reg. § 1.121(b)(2). The IRS agreed that a larger home with more bedrooms was needed to suitably accommodate a blended family that includes adolescent children of the opposite sex.

The ruling does not say how long Bill owned the residence or the amount of any gain he had from the sale. In any case, he would only be allowed to claim a pro rata portion of the $250,000 exclusion, as calculated under IRC section 121(b)(1).

SPONSORED REPORT

Keeping client information safe in an age of scams and security threats

A look at the Dirty Dozen tax scams and ways to protect taxpayer information.

TECHNOLOGY Q&A

How to create maps in Excel 2016

Microsoft Excel 2016 has two new mapping capabilities. J. Carlton Collins, CPA, demonstrates how to make masterful 2D and 3D maps in Excel 2016.

QUIZ

News quiz: IRS enforcement, a hot job, and audit value

The IRS’s 2016 Data Book, a “hot job” of particular interest at this time of year, and insight into how executive and audit committees view the insights from financial statement audits received attention recently. See how much you know with this short quiz.