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Tuesday, April 18, 2006


A taxpayer can exclude up to $250,000 of gain from the sale (or exchange) of a home owned and used by him as a principal residence for at least 2 of the 5 years before the sale. The exclusion doesn't apply if, within the 2-year period ending on the sale date, there was another home sale by the taxpayer to which the exclusion applied.

A reduced maximum homesale exclusion may apply to a taxpayer who fails to qualify for the 2-out-of-5-year ownership and use rule, or who previously sold another home within the 2 year period ending on the sale date of the current home in a transaction to which the exclusion applied. The failure to meet either rule must result from the home being sold (or exchanged) due to (1) a change of place of employment, (2) health, or (3) to the extent provided by regulations, other unforeseen circumstances. A home is sold due to unforeseen circumstances if the primary reason for the sale is the occurrence of an event that the taxpayer could not reasonably have anticipated before buying and occupying the residence.

In a recent private letter ruling, the taxpayer attempted to use the unforseen circumstances exception. After buying a residence with three bedrooms which was sufficient for his three sons and himself, he decided to adopt an orphan girl from a foreign country. Under State law, the taxpayer could not adopt her unless she had a separate sizable bedroom. To qualify for the adoption, the taxpayer sold his home which he had used and owned as his principal residence for less than two years, so as to rent a larger home.

On the facts, the IRS concluded that the taxpayer's primary reason for selling his home was an unforeseen circumstance, thus allowing him to exclude gain on the sale. Note, however, that a full $250,000 exclusion may not available - in these circumstances the exemption is prorated for the period of qualifying use.

PLR 200613009.

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