IRS Defines Hardship Rules For Capital Gains Tax Break On Home Sales

by Mike Godfrey, Tax-News.com, Washington

20 August 2004

The Internal Revenue Service has issued final rules allowing taxpayers forced to sell their homes due to certain unforeseen circumstances to claim a capital gains tax break.

The final rule defines these unforeseen circumstances as events “that the taxpayer could not reasonably have anticipated" before purchasing and occupying a residence. These could include a disaster such as a terrorist attack, redundancy or divorce.

Under the current rules, a single person can exclude profits of up to $250,000, while couples may exclude up to $500,000. Generally, these exclusions are granted provided the taxpayer has occupied the house for two of the last five years.

Congress approved the capital gains break in 1997 as part of the Taxpayer Relief Act. Left ambiguous however, was the meaning of the “unforeseen circumstances” that would allow taxpayers to bypass the two-year residency rule required for capital gains breaks.

The new rules will prorate the tax break based on the amount of time the taxpayer has lived in the house, meaning that a single person who lived in a home sold as a result of unforeseen circumstances could get a break on half of the $250,000 exclusion.

The new regulations are effective August 13, 2004 and apply to taxpayers who haven't owned and used the property as a principal residence for two of the last five years.

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