For several years home owners have enjoyed the exclusion of up to $500,000 of capital gains upon sale of their primary residence ($250,000 for single taxpayers). This exclusion applies if the home has been the taxpayer's primary residence for at least 2 of the last 5 years. But what happens if you sell your primary residence before reaching the 2 year mark? Recent private letter rulings provide some hope for people caught in this predicament.

While private letter rulings cannot be used as precedent to argue your case before IRS they do indicate the Service's thinking on certain matters. In this case several very different scenarios were reviewed by IRS and the taxpayer was allowed to exclude a portion of the home sale gain from taxation. The cases at issue involved...

• A couple who moved because they found they had purchased in a VERY bad neighborhood. Note that one of the taxpayers and the taxpayers' child were assaulted so don't consider using this as a broad argument to move into a more desirable area. IRS probably won't buy it.



• A family who moved to keep their children in the same school district. The family kept the previous home and rented it out because they planned to move back there eventually. When the family expanded the old home was too small and they sold it. A portion of the gain on this sale was able to be excluded.



• A couple who was forced to sell their home in an age restricted retirement community because their daughter and grandchild had to come live with them and were not old enough to live in the community.

All of these cases appealed to the "unforeseen circumstances" provision of Internal Revenue Code Section 121(c). IRS provides several 'safe harbor' situations that are automatically deemed to qualify as unforeseen circumstances. These include death, divorce or involuntary conversion of the residence. Additionally, the law allows IRS to designate other events as unforeseen. The above cases are examples of such designations.

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