How do I petition to the IRS for a partial exclusion of gain on the sale of a home?

[graceandjonathan]

Publication 523 indicates that exceptions may be granted, but I did not see instructions on how to go about obtaining one.

[Opus 17]

What exactly is your situation?

[graceandjonathan]

Not sure how to explain my situation without going into a sob story, so here it goes...

Mom passed away unexpectedly about 6 months ago. Dad is not doing well... may go as far as to say suicidal. Husband and I decided to buy a larger home to accommodate our family of four (us plus 2 small kids) and dad. To fund this new home purchase, we need to sell our primary residence (going on market in a few weeks) as well as a second home (in closing process) that is in my name but lived in by my brother. Dad reluctant to sell his home since he's still emotionally attached, so brother has moved into that home. Sale of primary home will qualify for full exclusion. I'm wondering if sale of second home can be seen as sold due to unforeseeable event and thus qualify for partial exclusion. Pub 523 seems to suggest IRS will consider these but doesn't indicate how to petition for an exception. My case for unforeseeable is that we neither expected to nor wanted to sell the secondary home (or even the primary home).

[Opus 17]

If you are asking for an exclusion on both your first and second homes, I don’t believe that can be granted under any circumstance.  To use the exclusion, you have to meet the two year residence rule out of the last five years, the two-year ownership rule, and you can’t have used the exclusion on a different home in the past two years, or 731 days.  The regulations allow certain exceptions to claim a partial exclusion if you don’t meet all the tests, But if you look at part B of worksheet one in publication 523, there is no way you could qualify for a partial exclusion for home #2.  The exclusion is based on the shortest of three periods: the length of time you used the home as your main home, the length of time you owned the home, and the length of time since the most recent time you used the exclusion.

You haven’t lived in home #2 as your main home, so that period would be zero.  And since you are selling #2 before #1, that period is a negative number.  Even if you qualified for a partial exclusion, the amount would be 0/731ths of the gain.  

You aren’t really asking for permission to use the partial exclusion rule, you’re asking to completely waive the capital gains tax on your second home and I don’t think that is possible under the law, regardless of how sad the individual circumstances are.  

[AmeliesUncle]

I agree with Opus. 

The exclusion is for the sale of your "Principal Residence".  If your second home has not been your "Principal Residence" in the last 5 years, it is cut-and-dry that you DON'T qualify for an exclusion on that home.

[graceandjonathan]

I see what you're saying. However, even though the second home is in my name, I don't really see it as my home. My brother lives in it, he pays for all the expenses associated with it, etc. He's selling his home and I'm selling mine so that we can provide a new home for our widowed father. But in the eyes of the law, the second home is an investment for me and I should pay capital gain tax on it? (Not trying to come off as argumentative; just want to make sure I'm interpreting the law correctly.)

[Opus 17]

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@graceandjonathan wrote:

I see what you're saying. However, even though the second home is in my name, I don't really see it as my home. My brother lives in it, he pays for all the expenses associated with it, etc. He's selling his home and I'm selling mine so that we can provide a new home for our widowed father. But in the eyes of the law, the second home is an investment for me and I should pay capital gain tax on it? (Not trying to come off as argumentative; just want to make sure I'm interpreting the law correctly.)

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Essentially yes.

You would have to give or sell the second home to your brother, and then if he sold it after 2 years, he wouldn't pay gains.  But if he then repaid you, it's a sham transaction and the IRS can come after you.  Or, if you gave him the home now and he sold in 6 months, he doesn't qualify for "unforeseen circumstances" because this is part of a planned strategy.

Basically, the law allows homeowners to protect their personal, primary residence from capital gains including unforeseen circumstances.  It is not intended to protect investors from unforeseen circumstances or emergencies.

[graceandjonathan]

Thanks for sharing your knowledge/perspective. Much appreciated.