Tuesday, February 28, 2012

Gain Exclusion from Personal Residence

Permanent Exclusion of Gain on the Sale of a Principal Residence- § 121 and § 1034

Exclusion rather than non-recognition provision. The new § 121 lets you exclude up to $250,000 on gain from the sale of their primary personal residence. Up to $500,000 with married couples filing jointly. You can’t get this more than once every two years. Taxpayer must own and occupy the residence for at least 2 out of 5 years before the exchange. No unqualified use like renting. The 2 years of ownership and use do not have to happen at the same time.

Ownership+ Use Requirement is vital to these problems. To Determine Time: IRS Balances in a Totality of the Circumstances Test:

  • Place of employment
  • Where do family members live
  • The address on tax returns, drivers license, auto registration
  • Mailing address for bills
  • Location of bank accounts
  • Location or religious organizations or religious clubs
There are key exceptions: §121 (c)(2) – If taxpayer has to sell his property due to a change in employment, health reasons, or unforeseen circumstances. The once every 2 years rule does not apply. Take the ceiling amount, for example 250k and multiply by a fraction (shorter of the time the property was owned, time property was used, time since last § 121) AMOUNT OF EXCLUSION    DISPUTED HEAVILY

Fact and Circumstances Test: Safe Harbor Provisions- Middle Ground between having bright line rule and blurry act and circumstances tests.

Definitely EMPLOYMENT related if:

  1. Someone has change in place of employment while owning a residence. The need place of employment is at least 50 miles away. Or If the person did not have a job and finds a job.
  2. Not requirement, you just need to show. Makes it easier to prove in court.
No safe harbor for HEALTH REASONS. Easy standard to meet.
What it means to move for health reasons is that the primary reason for sale is to obtain, provide, or facilitate the diagnosis, cure, or treatment of disease illness or injury or you are doing this for someone else. If your doctor tells you to move basically.  Merely beneficial to health does not qualify. Although it does not need to be necessary to cure your disease. T. Reg. § 1121-3(d)91)

UNFORSEEN CIRCUMSTANCES: Involuntary Conversion, Natural or manmade disasters, Terrorism or war, Death, Unemployment, employment status that causes taxpayer unable to pay living costs, Divorce, Multiple Births

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