Sale of Personal Residence for medical reasons

[tonia2021]

A taxpayer suffered a heart attack and stroke about 4 years ago. At that time, he and his wife moved to town. This wasn't at the suggestion of their doctor, howewver the taxpayer wasn't well and wasn't able to take care of the farmstead after he got sick. Now 4 years later, they are selling the farmstead. The taxpayer's do qualify for ownership, but not the use test. Would they qualify for a reduced exclusion due to medical reasons? Does a doctor have to suggest the move?

Thanks you for your response.

[RLymanC]

Redudced Exclusion

Medical reasons may not fly,,,look into the Unforseen Circumstances... TTB Deluxe 6-21 3) states a taxpayer can claim a reduced exclusion if the primary reason for the sale is due to the occurence of an event that the taxpayer could not have anticipated before buying the the home. This does not apply of the primary reason for the sale was a preference for a different home.

You don't say how long in the home before the move.

[Davc]

You also may have a proximate cause issue. When was the farmstead listed for sale?

[Luis Mopeo]

I think the health exception would clearly apply. The code says "change in place of employment, health, ...unforeseen circumstances.

If the taxpayer has a heart attack and can't live in the home any more, that sure seems like a health-related move to me.

I don't see any reason why the partial exclusion would not be allowed. It's a 2 of 5 year rule, exception for moving because of health means partial exclusion if the taxpayer doesn't meet the 2 of 5 year rule. It seems straight forward. What am I missing?

[Bees Knees]

It seems straight forward. What am I missing?

The problem is they sat on the house for 4 years after moving for health reasons. The reduced exclusion rules apply to selling your house before you qualify for the 2 out of 5 year rule because of some reason such as health reasons.

These taxpayers moved for health reasons at a time when they DID qualified for the 2 out of 5 year rule. But rather than try to sell the house at that time, they sat on the house for 4 years and had two places of residences. In essence, converting the principal residence into a second residence.

You can't use the exclusion on a second residence.

[Kram BergGold]

Disagree with Bees

They failed to meet the two year test due to a medical condition. If they lived there 1 year out of the 5 then I think they get the partial exclusion. Say someone lived in a house for 2 years then moved out for medical reasons and rented the house for 2 years and then sold. I would give them a full exclusion.

[joanmcq]

I don't think it flies because its been 4 years since the medical condition happened. I agree with the second home and that the partial exclusion would only be applicable if the medical condition happened a year after they bought the property and caused the sale, not 4 years before the sale.

[Bees Knees]

They failed to meet the two year test due to a medical condition. If they lived there 1 year out of the 5 then I think they get the partial exclusion. Say someone lived in a house for 2 years then moved out for medical reasons and rented the house for 2 years and then sold. I would give them a full exclusion.

Well, you may be right, but IRS Pub 523, page 15 says:

The sale of your main home is because of health if your
primary reason for the sale is:
• To obtain, provide, or facilitate the diagnosis, cure,
mitigation, or treatment of disease, illness, or injury
of a qualified individual, or
• To obtain or provide medical or personal care for a
qualified individual suffering from a disease, illness,
or injury.

Note the term “primary.”

What is the “primary” reason for selling a house you haven’t lived in for 4 years? Yes, they moved to get medical care, but they didn’t sell their house when they went to get medical care. It wasn’t until after 4 years that they decided to sell their house.

The question is, why did they sell? To get medical care? Or because they no longer want two homes?

[Luis Mopeo]

The problem is they sat on the house for 4 years after moving for health reasons. The reduced exclusion rules apply to selling your house before you qualify for the 2 out of 5 year rule because of some reason such as health reasons.

Where do you find the rule that the reduced exclusion applies only to selling you house before you qualify for the 2 out of 5 years?

There's an example in Pub 523 that's very close to this. An elderly woman moves out of her home for health reasons in 2004 and into her daughter's apartment. She sells the house in 2006. She qualifies for the exclusion. Moving into her daughter's apartment didn't turn it into a second home and disqualify the exclusion.

[Bees Knees]

There's an example in Pub 523 that's very close to this. An elderly woman moves out of her home for health reasons in 2004 and into her daughter's apartment. She sells the house in 2006. She qualifies for the exclusion. Moving into her daughter's apartment didn't turn it into a second home and disqualify the exclusion.

The example you quoted in the Pub has nothing to do with the reduced exclusion rule. She met the 2 out of 5 year rule because she lived there in 2 out of the last 5 years. That example is only given to illustrate that time spent renting the condo prior to ownership qualifies for the 2 out of 5 year test.

The reduced exclusion applies when you don't meet the 2 out of 5 year test.

[Luis Mopeo]

The example you quoted in the Pub has nothing to do with the reduced exclusion rule. She met the 2 out of 5 year rule because she lived there in 2 out of the last 5 years. That example is only given to illustrate that time spent renting the condo prior to ownership qualifies for the 2 out of 5 year test.

The reduced exclusion applies when you don't meet the 2 out of 5 year test.

Since we've established that there is not a rule where a person has to sell before they qualify for the reduced exclusion, and that moving into another home before the sale does not disqualify the reduced exclusion, we're down to what is the "primary reason."

We can only go with the information we have. I see "farmstead," I see "heart attack and stroke," and I see "moved into town." That paints a picture for me of an older person who has lived on and worked the family farm for many years, who gets sick and can't work the farm any more, then moves into town for rest and rehab. Let's call him "Ernie."

"Primary reason" is going to be facts and circumstances, where substance will overrule form. What is the real reason Ernie sold the house? For the next 50 years, when the next generations are reminiscing about Grandpa Ernie, they'll tell the story of how he had a heart attack and stroke and had to sell the family farm. That's how they ended up in Duluth.

There's nothing in the original post that would give rise to the assumption that Ernie sold the farm for any reason other than health. Why four years? There could be lots of reasons. Maybe he thought he'd get better. Maybe he and the Mrs. were so devastated that selling was the last thing on their minds. Maybe they were hoping to keep it in the family but couldn't hold out any longer. Nothing in those scenarios would change the fact that they sold the farm because of health problems.

[Bees Knees]

There's nothing in the original post that would give rise to the assumption that Ernie sold the farm for any reason other than health. Why four years? There could be lots of reasons. Maybe he thought he'd get better. Maybe he and the Mrs. were so devastated that selling was the last thing on their minds. Maybe they were hoping to keep it in the family but couldn't hold out any longer. Nothing in those scenarios would change the fact that they sold the farm because of health problems.

Good argument. Assuming those are the facts.

Maybe, on the other hand, Ernie moves into town due to health reasons and leaves his brother Bert on the farm to run things, as Bert has been down on his luck and needs a break. After four years of Bert's drinking, Ernie says enough already, I'm sick. I can't move back. Bert is ruining the farm. I better sell.

Now why did he sell? Yeah, he sold because he was sick, but his primary reason for selling was because his brother Bert is a loser.

It all depends.

[Kram BergGold]

The winner is?

It Depends wins again. Good luck on this one with the facts and circumstances.

[Golden Rocket]

Ernie Wins

Ernie is entitled to a reduced exclusion for medical reasons.

The only thing happening due to the 4-yr. lapse is to make it more difficult to prove the sale was for medical reasons. There can be all manner of reasons for the delay that do not detract from the medical issue - poor market, attempted negotiations with relatives for the family farm, waiting on a buyer from neighboring farm, etc. And, at the heart of the issue, the MOVE was precipitated by medical reasons, not the SALE.

As a preparer, I think we have to aggressively take the position in favor of the taxpayer. Conversations with the client that reveal unsupportable reasons notwithstanding, Ernie is the big winner in his new home in (brrrrrr) Duluth.

[Davc]

The only thing happening due to the 4-yr. lapse is to make it more difficult to prove the sale was for medical reasons. There can be all manner of reasons for the delay that do not detract from the medical issue - poor market, attempted negotiations with relatives for the family farm, waiting on a buyer from neighboring farm, etc. And, at the heart of the issue, the MOVE was precipitated by medical reasons, not the SALE.

As a preparer, I think we have to aggressively take the position in favor of the taxpayer. Conversations with the client that reveal unsupportable reasons notwithstanding, Ernie is the big winner in his new home in (brrrrrr) Duluth.

You're contradicting yourself. From the code:

"(2) Sales and exchanges to which subsection applies
This subsection shall apply to any sale or exchange if—
(A) subsection (a) would not (but for this subsection) apply to such sale or exchange by reason of—
(i) a failure to meet the ownership and use requirements of subsection (a), or
(ii) subsection (b)(3), and
(B) such sale or exchange is by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances."

The word "move" is notably absent.