@Mike9241 wrote:
you should be able to rely on IRS LTR Ruling 200601009 - criminal activities in the neighborhood. this is a specific situation that the IRS has ruled is an unforeseen circumstance
https://www.irs.gov/pub/irs-wd/0601009.pdf
While private letter rulings are not legally binding on anyone other than the taxpayer who requested it, it usually indicates the direction that the IRS will take when reviewing similar situations.
(Interesting to think that, I believe it costs $10,000 to obtain a private letter ruling, so the taxpayers in this case were selling a home that was both (a) in a criminal neighborhood, and (b) had so much gain in less than 2 years that it was worth it to pay $10,000 to save on the capital gains tax. I don't think there are many houses that would fit that bill of particulars.)
