RC section 121(c) allows a partial exclusion of gain from the sale of a principal residence for taxpayers who fail to meet the ownership, use and frequency-of-sale tests to qualify for the maximum exclusion under section 121(b) ($250,000 if single; $500,000 if married filing jointly). The IRS recently offered guidance on qualifying for the reduced exclusion, of which CPAs should be aware.
Under temporary regulations section 1.121-3T(e)(2)(iv), the IRS is authorized, from time to time, to provide guidance on “unforeseen circumstances.” It now has done so.
The ruling indicates the taxpayers did not expect A to live with them in House 2 permanently. However, during the second month of the couple’s residency, A lived there under a court-ordered house arrest and continuing rehabilitation counseling.
According to the ruling, the couple’s neighbors did not welcome the former jailbird. Rather, they purportedly made threats against A, interfered with A’s attempts to find employment and objected to the former criminal’s spending time in the yard outside the couple’s house. In addition, A’s probation officer was said to believe A would have a better chance of reducing the period of house arrest and probation if the couple sold the house and moved.
For more information, see the Tax Clinic, edited by Terence Kelly, in the May 2004 issue of The Tax Adviser .
—Lesli Laffie, editor