sold house after 19 months - unforeseen circumstance

[craftymama]

Hi - I sold our family's primary residence that we'd lived in/owned for 7 years (2 bedrooms was not enough space with 4 kids!) and bought another home.  We sold that 19 months later due to unforeseen circumstances. I'd like an opinion on whether the following counts as "other unforeseen circumstances" in terms of a partial exclusion.

The house was purchased Dec 4, 2020.  I had an idea for a new business venture in Feb/March 2021.  Business began in April/May and showed a profit that very first year.  This is a craft business that uses much space and produces large product and I began working out of our ~50 sq ft pantry.  It soon felt like the business was taking over our family home - with product and supplies in many common spaces.  Our new home has a 320 sq ft dedicated studio that is filled with supplies, equipment and work spaces.  (I also use the basement laundry, kitchen sink and stovetop along with storage in the attached barn).  Another nice profit in 2022 and continuing success into 2023.  I feel this constitutes a work related move and can take the partial exclusion under unforeseen circumstances.

Thank you for your thoughts.

[Opus 17]

The regulations have several "safe harbors" -- circumstances which will be accepted for the partial exclusion if you meet them.  You do not meet the safe harbor for a work related move since you work at home.

https://www.irs.gov/publications/p523

However, you might meet the "other facts and circumstances" rule.  You have to decide this for yourself.  If you want a professional opinion you can rely on if audited, you will need to hire your own professional, we can only offer suggestions and point you to the right rules.

Other Facts and Circumstances

Even if your situation doesn’t match any of the standard requirements described above, you still may qualify for an exception. You may qualify if you can demonstrate the primary reason for sale, based on facts and circumstances, is work related, health related, or unforeseeable. Important factors are:

• The situation causing the sale arose during the time you owned and used your property as your residence.

• You sold your home not long after the situation arose.

• You couldn’t have reasonably anticipated the situation when you bought the home.

• You began to experience significant financial difficulty maintaining the home.

• The home became significantly less suitable as a main home for you and your family for a specific reason.

[craftymama]

Hi, and thank you for your response.  All those apply except the significant financial difficulty part...

Does it matter that we took the full exclusion for the sale 19 months prior?  I told the Turbo Tax program that we sold and took the exclusion for that sale and it seems we are able to do the partial exclusion...if I determine our situation falls under the "other unforeseen circumstances" that is.

I read in my research that the tax courts have asked the IRS to better define what that includes.  Has anyone seen this?  I can't find the reference any longer..

[PattiF]

You can take the partial exclusion based on the points described in the IRS section :

Other Facts and Circumstances

Even if your situation doesn’t match any of the standard requirements described above, you still may qualify for an exception. You may qualify if you can demonstrate the primary reason for sale, based on facts and circumstances, is work related, health related, or unforeseeable. Important factors are:

• The situation causing the sale arose during the time you owned and used your property as your residence.
• You sold your home not long after the situation arose.
• You couldn’t have reasonably anticipated the situation when you bought the home.
• You began to experience significant financial difficulty maintaining the home.
• The home became significantly less suitable as a main home for you and your family for a specific reason.

Keep records of everything in case the IRS inquires about this. Your situation appears to qualify for the partial exclusion.

@craftymama 

[Opus 17]

@craftymama 

The regulations gives that list as factors that are important, but not necessarily the only important factors, and you don’t necessarily need to meet every factor.

The actual regulations are here, if you are interested.  

https://www.law.cornell.edu/cfr/text/26/1.121-3

What seems to me to be the important part is that the home has become unsuitable to continue to live in due to circumstances that were not predictable when you originally bought the home.  The examples in the regulations focus on the home becoming unsuitable because of  financial difficulty, or suddenly having too many kids, or someone being ill.  But there is nothing that says that good fortune can’t also make a home unsuitable, such as having a successful home business that takes up too much space.

unfortunately, the decision is up to you as to whether the risk is worth taking.