Under Internal Revenue Code Section 121, taxpayers can avoid paying tax on the sale of their principal residence if they live in the home for more than two years. A single taxpayer can avoid paying tax on up to $250,000.00, and married taxpayers can avoid paying tax on up to $500,000.00 of gains from the sale of their principal residence.
The home sale exclusion cannot be used more frequently than every two years. Partial exclusions are allowed for specific events such as death, divorce, some changes in employment status and the birth of multiple children. However, the IRS is willing to consider rulings on other unforeseeable events that may qualify.
In a Private Letter Ruling issued on April 11, 2016, the IRS ruled in favor of a husband and wife allowing them to exclude a portion of the gain of the sale their condominium with two small bedrooms in which they had resided for less than two years because the wife became pregnant and gave birth to the couple’s second child.
The IRS ruled that the birth of their second child was unforeseen at the time that the couple bought the condominium and that “the suitability of [the two-bedroom condominium] as the Taxpayers’ principal residence materially changed.” Private Letter Rulings are not particularly common and come at a cost. In this instance, the cost for filing a Private Letter Ruling can cost up to $6,500.00, depending on the gross income of the person seeking the ruling.
Worse yet, if the IRS rules against you, you don’t get that money back. If you have sold your principal residence after living in it for less than two years, you may qualify for a partial exclusion. For questions about Internal Revenue Code Section 121, call Chicago tax lawyer Patrick T. Sheehan and Associates at 1-8774-IRS- LAW