Q:

Subject: Sale of Primary Residence

 

Kerry,

A friend and his wife bought a house in foreclosure and remodeled it themselves.  As a result, they are sitting on a substantial unrealized gain.

His wife is pregnant and they would like to sell their house due to the pregnancy, but they have not lived in it for 2 years.  Does the pregnancy count as an "unforeseen circumstances" for getting the pro-rated gain exclusion?  It was, in fact, unplanned.  I reviewed your site and the IRS site, and the only thing I found regarding pregnancy referred to multiple births from the same pregnancy, so I am not sure if this disqualifies a single birth from the exclusion.  Thank you for your help.

A:

Following is a quote from the IRS publication 523 on home sales in regard to the application of the pro-rated tax free exclusion:

The suitability of your property as a home materially changed,

If the home was originally purchased for the benefit of a certain sized family, and the family has grown to the point that the home is no longer able to handle the capacity, that is a valid reason to force you to sell before the full two years are up.

Based on how you explained your situation, you should qualify for the pro-rated tax free exclusion.  Your personal tax advisor should be able to help you with more specifics, such as the size of your actual gain.

Good luck with your new baby and the upcoming move.

Kerry Kerstetter

Follow-Up Q:

Kerry,

Thank you for the speedy reply.  Even if the house would still reasonably fit a family of 3?  Would the IRS argue that a 3-bedroom house is able to handle the capacity so the exclusion does not apply?

Thanks again for your help.

A:

As in all tax matters, the burden of proving that you are doing things properly rests with you.

You made the claim that the move to a bigger house was due to the impending birth.  You should feel strongly enough about that rationale to be able to convince IRS in the unlikely chance of a challenge. 

The number of bedrooms your house has isn't the issue, depending on how you are using them.  For example, my wife and I live in a house with four bedrooms. However, two are fully used as offices and one is used for storage and computer servers.  If we needed space for more people, as we may soon need with some of Sherry's relatives who have been displaced by the New Orleans hurricane, we would need to find new space for them. 

If the three bedrooms you currently have don't allow space for the new baby, a move to a new home seems like the logical thing to do.

Again, check with your personal tax advisor for more specifics on your situation.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 9/03/2005 09:52:00 PM Send this post: