Sec 121 - partial exclusion

[kschenk]

I have a client that purchased a second home in August 2003 as the land across the street was being purchased by a large shopping development. Their intention was to sale the first home; however, they wanted to fix up before selling. They had short-term leases with several college students and rented some in 03, 04, 05 and 06. They listed the house the beginning of this year. Two signed agreements fell through - and both would have been within the two of five-year rule. The house was finally sold in November 2006, so they only lived in house for 21 months out of last five years. All income was claimed on Schedule E. Do you think that a partial exclusion could be taken on this sale? Would the sales agreements that fell through allow for an "unforeseen circumstance"?

Any help is appreciated.

[jainen]

Tough luck

Tough luck. There is no exception for not selling a house because of unforeseen circumstances. The exception is for actually selling it. When they decided to treat their home as an investment and hold out for the highest price, they accepted the risk that goes with the profit potential.

[Bees Knees]

The exception to the 2 out of 5 year rule applies when the taxpayer must sell because of change of employment, for health reasons, or for some unforeseen circumstance. You indicate the taxpayer doesn't pass the 2 out of 5 year rule because they could not sell the house in time. That is not selling due to unforeseen circumstances. That is a lack of selling due to unforeseen circumstances. Section 121(c)(2)(B) is very clear that it is the sale by reason of one of the above that allows the reduced exclusion, not the failure to sell on time because the taxpayer had already moved years ago and the 3 year period was about to expire.