Is vandalism by a neighbor qualify as “unforeseen circumstance” under capital gains?

[Catchasoundset]

Selling my home due to bad neighbors vandalizing my home.  Not the only person in the Mobile Home Park (including park owner) who had been subject to the problem that has been going on for 6 months.  Usually coffee or eggs tossed at my fence, home walls.  Same for owner.  Two police reports taken.  

Sale will be around $250,000 hopefully.  Should I exceed that threshold, can I reduce my capital gains using “unforeseen circumstances”.  (Yes I have cameras, but they work around them).  

[maglib]

@Catchasoundset 

The law (Section 121c of the Internal Revenue Code) allows partial exclusions of gain where "such sale . . . is by reason of a change in place of employment, health, or to the extent provided in regulations, unforeseen circumstances."

Unforeseen circumstances is extremely broad and allows the IRS to look at case by case circumstances.  

Be prepared to validate your claim.   Nobody can tell you outright if you would win.

The IRS has ok'd this case in the past but, that can no way be used to validate your claim: "

X, a member of a taxpayer's family and an inhabitant of the taxpayer's house, was convicted of a crime, placed on probation and spent one year at a rehabilitation facility. While X was in rehab, the taxpayer bought a new house, which became the principal residence. According to the facts, when the house was purchased, the taxpayer expected that X would not live there permanently.

However, after one year, the court ordered X to live at the home under house arrest and to continue receiving rehabilitation counseling. The neighbors began to vehemently protest X's presence, and even interfered with X's efforts to find a job. X's probation officer recommended that the house be sold so that the family could move to another neighborhood.

The taxpayer sold the house before the full two-year period for living in and owning it had elapsed.

The IRS concluded that the primary reason for the sale of the house was an unforeseen circumstance, and allowed the taxpayer to exclude gain up to the "reduced maximum exclusion" amount. (IRS Private Letter Ruling, 200403049. Such private letter rulings are binding only on the taxpayer who requested the ruling, and may not be cited as precedent for other such tax cases. Nevertheless, they do indicate the thinking of the IRS.)"

Hope this was helpful. 

[Catchasoundset]

Thank you for the quick response!  I understand the explanation. Curious what the "exclusion" percentage might be to make it worth the trouble to file for should I sell this year.  Is that a Case by case amount as well?  Can my CA realtor possibly help? 

[rjs]

The partial exclusion is not a fixed percentage, it's not a case-by-case determination, and it's not subject to any judgement. If you qualify for a partial exclusion, the amount of the exclusion is calculated in Section B of Worksheet 1 on page 7 of IRS Publication 523, Selling Your Home.

[Mike9241]

the exclusion whole or partial only applies to your principal residence. 

you get to choose between whole months (ie must be occupied by you from the first day to the last day of the month) or days of occupancy. temporary absences like for vacation or medical treatment are considered as occupancy.

for a single taxpayer the $250,000 exclusion is prorated based on the ratio of the period of occupancy to either 24 months or 730 days depending on which option you choose. Only occupancy within 5 years of sale counts.  if you owned and occupied it as your principal residence lived there for either of these periods (ie 24 full months or 730 days within the 5 years you're entitled to the full exclusion and don't need a reason. 

the IRS REG 1.121-3(b) states that if the taxpayer's home sale does not qualify under the safe harbor rules, the taxpayer can still satisfy the unforeseen circumstance reason for the sale based on particular facts and circumstances. Factors that may be relevant in determining the taxpayer's primary reason for the sale or exchange include (but are not limited to) the extent to which—

(1) The sale or exchange and the circumstances giving rise to the sale or exchange are proximate in time;

(2) The suitability of the property as the taxpayer's principal residence materially changes;

(3) The taxpayer's financial ability to maintain the property is materially impaired;

(4) The taxpayer uses the property as the taxpayer's residence during the period of the taxpayer's ownership of the property;

(5) The circumstances giving rise to the sale or exchange are not reasonably foreseeable when the taxpayer begins using the property as the taxpayer's principal residence; and

(6) The circumstances giving rise to the sale or exchange occur during the period of the taxpayer's ownership and use of the property as the taxpayer's principal residence.

so keep copies of police report and any pictures taken showing the vandalism even if the perps are not in the pictures. 

[Catchasoundset]

Thank you!  Will check out the worksheet!

[Catchasoundset]

Thank you for the details.  Looks like I have some reading and a worksheet to review. 

[Hal_Al]

Q.  Is vandalism by a neighbor qualify as “unforeseen circumstance” under capital gains?

A. Simple answer: Yes.  But, more accurately, "probably", as explained at the other replies.

Q. Curious what the "exclusion" percentage might be?

A.  It's not actually an exclusion percentage or prorated exclusion.  When you fail to meet the 2 year rules, but are claiming an exception for “unforeseen circumstances", you are allowed a reduced maximum exclusion.  It's best explained by example. If you only lived there 8 months, the maximum you could exclude would be 8/24 x $250,000 = $83,333.  So, as long as your gain was less than $83,333, you would be allowed to exclude the entire gain. 

[Opus 17]

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@Catchasoundset wrote:

Thank you for the quick response!  I understand the explanation. Curious what the "exclusion" percentage might be to make it worth the trouble to file for should I sell this year.  Is that a Case by case amount as well?  Can my CA realtor possibly help? 

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The partial exclusion is calculated on time.  For example, if you lived in the home 14 months, your time percentage is 14/24 or 58.3%.  That means you can exclude the first $250,000 x 58.3% = $145,833 of gain.  Any gain over that is taxable.  You can calculate the percentage by months or by days, if counting days gives you a higher percentage.  The exclusion is based on whichever time is the shortest:

a. how long you owned the home

b. how long you lived in the home as your main home

c. how long since you last used the exclusion on the sale of a home.

For example, if you closed on the home on May 1, 2022, moved in on May 15, and closed on the sale of your previous home on May 25, 2022 (and used the exclusion), you would use May 25 as the starting date for calculating the exclusion percentage. 

[Opus 17]

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@Hal_Al wrote:

Q.  Is vandalism by a neighbor qualify as “unforeseen circumstance” under capital gains?

A. Simple answer: Yes.  But, more accurately, "probably", as explained at the other replies.

Q. Curious what the "exclusion" percentage might be?

A.  It's not actually an exclusion percentage or prorated exclusion.  When you fail to meet the 2 year rules, but are claiming an exception for “unforeseen circumstances", you are allowed a reduced maximum exclusion.  It's best explained by example. If you only lived there 8 months, the maximum you could exclude would be 8/24 x $250,000 = $83,333.  So, as long as your gain was less than $83,333, you would be allowed to exclude the entire gain. 

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Also note that if you sell in less than 1 year, any gain that is not eligible for the exclusion will be taxed as short term capital gain which means ordinary income rates of 12%-36% depending on your other income.  If you own the property more than one year (366 days), any gain that is not covered by the exclusion will be taxed as long term capital gains at rates of 0%-20% depending on your other income. 

[Catchasoundset]

Thank you. I left out to all that gave great answers, that I have been in the home as owner for 6 years. Vandalism has been a problem for the last 6 months.

Thanks so much again. I am sad to leave but feel unsafe. 

[Mike9241]

just to reiterate living in and owning it for any 2 years in the 5 years before sale which seems to be your situation means you don't have to provide a reason for sale to get the full exemption. 

[Opus 17]

@Catchasoundset 

I don’t understand why you are asking about a partial exclusion.  If you owned the home more than 2 years and lived in it as you main home the whole time, you qualify for the full exclusion.  

However, if you owned the home for 6 years but have used the home as your main home less than 2 years, then the situation may become much more complex and we have to ask when did you start and stop living in the home as your main residence, and what else did you use the home for when you weren’t using it as your main residence (such as, did you rent it out).   

[Catchasoundset]

Hi. "Partial" was a poor choice of verbiage. What I meant was say I sell for $260,000, what percent of that figure can I reduce due to the "unforeseen circumstance"?  I need to hit the suggested worksheets and maybe it's there. 

Thanks and sorry for the confusion. 

[Opus 17]

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@Catchasoundset wrote:

Hi. "Partial" was a poor choice of verbiage. What I meant was say I sell for $260,000, what percent of that figure can I reduce due to the "unforeseen circumstance"?  I need to hit the suggested worksheets and maybe it's there. 

Thanks and sorry for the confusion. 

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The unforeseen circumstance rule only comes into play if you don't qualify for the standard exclusion based on the 2 year/5 year rule.

If you do qualify for the standard exclusion, it doesn't matter why you are selling.  You get a $250,000 exclusion (or $500,000 if married filing jointly) and any gain over that is a long term capital gain.  You can't get a larger exclusion because of a hardship.