Home gain sale-prorated exclusion


M

Mike Lewis

A couple of years ago (or longer), I expressed a position
that the "unforeseen circumstances" clause of the rules
permitting partial exclusion of the gain on a home which had
NOT met the full 2 year ownership/residence rule under IRC
121 could be used as a very broad exception since
"unforeseen circumstances" was yet undefined. My initial
position on this topic was prompted first by a CPE seminar I
attend each year sponsored by the Texas Extension Education
Foundation, Inc (Tax Practitioner
Workshop..www.taxworkshop.com).

Today I finished another such two-day seminar. The same
instructor (Richard Griffith, CPA) covered the same topic.
He spent 29 years with the IRS, the last 12 in appeals, and
is now in public practice as well as still affiliated with
the Foundation.

His stance on this topic is the same. I told him that when I
had stated on this newsgroup that the "unforeseen
circumstances" permitted a loose interpretation that
everyone on the group had disagreed (in a very constructive
manner I might add), he responded by saying I should bring
the topic up again and ask everyone to review all the
actions over the last 2 or three years on this matter. In
his opinion, there are now several more "specific safe
harbors" and there will be more as practitioners use new
"unforeseen circumstances". In his view, the exception "an
event determined by IRS to be an unforeseen circumstance"
does not restrict us from taking a more liberal view on
whether a sale not meeting the 2 year period might qualify
for a pro-rated exclusion. It simply makes it a potential
difference of opinion with the IRS auditor, and will
ultimately be determined on the specific facts and
circumstances.

I agree there should be a compelling argument that the sale
was unexpected due to a specific set of circumstances
preventing the taxpayer from postponing the sale to the full
2/5 year rules. However, I don't agree that we must wait
until this specific set of circumstances appears on a
settled case, reg, etc....It will be these cases that will
broaden the "safe harbor" items.

Well, I didn't write this to be argumentative. I am just
encouraging everyone to revisit their earlier position.
Developments since our last discussion may make some want to
reassess their positions.

Happy holidays to you all!!

Mike Lewis, CPA
 
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D

Dick Adams

Mike Lewis said:
A couple of years ago (or longer), I expressed a position
that the "unforeseen circumstances" clause of the rules
permitting partial exclusion of the gain on a home which had
NOT met the full 2 year ownership/residence rule under IRC
121 could be used as a very broad exception since
"unforeseen circumstances" was yet undefined. My initial
position on this topic was prompted first by a CPE seminar I
attend each year sponsored by the Texas Extension Education
Foundation, Inc (Tax Practitioner Workshop..www.taxworkshop.com).
.....
In the language of us Auditors, there is a significant
difference between "unforseen" and "unforseeable". As in
I would have never bought this house if I had forseen
1) my spouse would die;
2) my spouse would run off with a lover;
3) my employer would go out of business;
4) one of my parents would die and I would to
a) relocate to run the family business or
b) buy a larger home to care for my surviving parent;

What I fail to understand here is how often someone buys
and sells a principle residence within two years and has
a taxable profit worth discussion!

Dick
 
T

Timothy E. Kelly, Esq.

Mike Lewis said:
A couple of years ago (or longer), I expressed a position
that the "unforeseen circumstances" clause of the rules
permitting partial exclusion of the gain on a home which had
NOT met the full 2 year ownership/residence rule under IRC
121 could be used as a very broad exception since
"unforeseen circumstances" was yet undefined. My initial
position on this topic was prompted first by a CPE seminar I
attend each year sponsored by the Texas Extension Education
Foundation, Inc (Tax Practitioner
Workshop..www.taxworkshop.com).

Today I finished another such two-day seminar. The same
instructor (Richard Griffith, CPA) covered the same topic.
He spent 29 years with the IRS, the last 12 in appeals, and
is now in public practice as well as still affiliated with
the Foundation.

His stance on this topic is the same. I told him that when I
had stated on this newsgroup that the "unforeseen
circumstances" permitted a loose interpretation that
everyone on the group had disagreed (in a very constructive
manner I might add), he responded by saying I should bring
the topic up again and ask everyone to review all the
actions over the last 2 or three years on this matter. In
his opinion, there are now several more "specific safe
harbors" and there will be more as practitioners use new
"unforeseen circumstances". In his view, the exception "an
event determined by IRS to be an unforeseen circumstance"
does not restrict us from taking a more liberal view on
whether a sale not meeting the 2 year period might qualify
for a pro-rated exclusion. It simply makes it a potential
difference of opinion with the IRS auditor, and will
ultimately be determined on the specific facts and
circumstances.

I agree there should be a compelling argument that the sale
was unexpected due to a specific set of circumstances
preventing the taxpayer from postponing the sale to the full
2/5 year rules. However, I don't agree that we must wait
until this specific set of circumstances appears on a
settled case, reg, etc....It will be these cases that will
broaden the "safe harbor" items.

Well, I didn't write this to be argumentative. I am just
encouraging everyone to revisit their earlier position.
Developments since our last discussion may make some want to
reassess their positions.
If there is a reasonable case under the general facts and
circumstances of Regulation 1.121-3T(b), put forth the
argument, then take it to Appeals administratively set up so
the IRS in the Tax Court will have to prove the
circumstances were not unforeseen. No need to wait for a
safe harbor. Under a hazards of litigation review, Appeals
will have to accept the risk of a new court-made safe harbor
being established unless they prove otherwise.

Timothy E Kelly, Esq.
Certified Specialist, Taxation Law
State Bar of California
Board of Legal Specialization
 
M

Mike Lewis

In the language of us Auditors, there is a significant
difference between "unforseen" and "unforseeable". As in
I would have never bought this house if I had forseen

1) my spouse would die;
2) my spouse would run off with a lover;
3) my employer would go out of business;
4) one of my parents would die and I would to
a) relocate to run the family business or
b) buy a larger home to care for my surviving parent;

What I fail to understand here is how often someone buys
and sells a principle residence within two years and has
a taxable profit worth discussion!
Under Reg.1.121-3T, all but #4 are either now safe harbors
or could be argued to be. I wouldn't totally rule out #4
with the right circumstances and facts. One of the facts and
circumstances in this new Reg is "the suitability of the
property as the taxpayer's principal residence materially
changes". Also, multiple births is now a safe harbor. To me,
this could be used to argue 4(b), ie, more room was needed
to take care of the family.

I agree that usually such a sale generates a very small
gain, but no tax still beats capital gains tax. My agressive
position was taken because I had just filed a return where
the taxpayer's father had given him his house (some of my
clients don't ask me before they do stupid things:)) with
virtually no basis due to the old home sale/gain rollover
rules. The taxpayer had a $150,000 gain. He sold the home
just a couple of months before fulfilling the time rules
because of a divorce. We excluded the entire gain, and now
the new Reg calls this a safe harbor.

My point-if there is no precedent to site but there's a
poorly worded clause like "other unforeseen circumstance" to
point to, an agressive position can be taken so long as the
tax professional keeps his client advised that they are
treading on questionable ground and could lose the argument.

Mike Lewis, CPA
 
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D

D. Stussy

In the language of us Auditors, there is a significant
difference between "unforseen" and "unforseeable". As in
I would have never bought this house if I had forseen
1) my spouse would die;
2) my spouse would run off with a lover;
3) my employer would go out of business;
4) one of my parents would die and I would to
a) relocate to run the family business or
b) buy a larger home to care for my surviving parent;

What I fail to understand here is how often someone buys
and sells a principle residence within two years and has
a taxable profit worth discussion!
1) In my recent tax class (sponsored by the University of
Denver, in my case), the instructor and materials came to
a similar interpretation. #4 also came up as an example
in my class, as well as a CASUALTY to the residence.

2) I'm shocked at Dick Adams daring to use the word "spouse"
in a tax situation such as above! :) Does that mean
that "living in sin for fun and profit" now only relates
to those located in Clark County, NV? ;-)

============================================================
Moderator:
My apologies!! Please replace spouse with paramour,
consort, mistress, lover, gigolo, or shack job.

As an aside: Altough I am a Conservative Republican,
I support gay marriage for three reasons. What the hell
is do special about homesexuals that they should be spared
from:
1) the marriage penalty tax;
2) mothers-in-law;
3) the knowledge that you get treated better before
marriage than afterwards.
============================================================
 

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