NEW RULES FOR PARTIAL USE OF THE $250,000 / $500,000 EXCLUSION.
The biggest changes in the rules for applying IRC §121 occurred on the
topic of partial exemptions when the residency doesn't meet the full two
out of the last five years test. To illustrate, if a home seller lived in
their residence only 12 months after purchase, a 50% exclusion up to
$125,000 (50% of $250,000) for a qualified single owner, or up to $250,000
(50% of $500,000) for a qualified married couple is available.
Although these IRS Regulations are temporary. they are likely to become
permanent and can now be used retroactively for taxed principal residence
sales which are still open to amend for up to three years after the income
tax return due date or extension date - currently tax years 1999. 2000.2001.
and of course 2002 are "open." Home sellers who paid capital gain tax on their
home sale profit in those tax years should file IRS Form 1 04 OX to amend their
tax returns and claim a refund if eligible for a retroactive partial exemption.
Internal Revenue Code § 121(c) says a home seller who fails to meet the full
two-year occupancy test can qualify for a partial exemption if the sale is due
to (1) change in place of employment, (2) health reasons, or (3) unforeseen
circumstances.
Change in place of employment is defined, as expected, to conform to the
moving cost tax deduction. That means a home seller can qualify for the partial
exemption if a household member's new workplace is at least 50 miles further
away from the residence than was their old job site. To illustrate, suppose the
distance from the principal residence to the former work location was five miles.
That means the distance to the new job location must be at least 55 miles, in this
example, to qualify for the partial home sale tax exemption after less than 24
months of ownership and/or occupancy.
The moving cost tax deduction also has additional work time tests, such as
being employed at least 39 weeks during the year after the move in the vicinity
of the new job site. For self-employeds, the minimum qualifying work time test is
78 weeks during the following 104 weeks after the job location change.
Health reasons are now defined, in addition to a physician's recommendation to
the homeowner or a family member for a move due to health reasons, to include
additional purposes such as (1) to obtain, provide, or facilitate the diagnosis,
cure, mitigation, or treatment of disease, illness, or injury of a qualified
individual (defined as the taxpayer, spouse, residence co-owner, and certain other
family members living in the residence), and (2) need to move to care for a family
member. However "a sale or exchange that is merely beneficial to the general health
or well-being of the individual is not a sale or exchange by reason of health."
Unforeseen circumstances now include several "safe harbor" principal residence sale
reasons which the IRS will not challenge. The first five reasons must involve the
taxpayer, spouse, co-owner, or a member of the taxpayer's household. In addition,
the IRS Commissioner has the discretion to determine other circumstances which are
unforeseen:
- Death;
- Divorce or legal separation;
- Becoming eligible for unemployment compensation;
- Change in employment which leaves the taxpayer unable to pay the
mortgage or reasonable basic living expenses;
- Multiple births resulting from the same pregnancy;
- Damage to the residence resulting from a natural or man-made disaster,
or an act of war or terrorism; and
- Condemnation, seizure or other involuntary conversion of the property.
