Exclusion of gain on sale of residence

[pyle-patty]

Clients lived in residence for 20 years.  MFJ.  Sold residence in 2021. Had 170,000 gain excluded.

Client bought new home in 2021. Sold in 2022 due to unforseen circumstances.  Lived in 2nd home

16 months.  According to the calculations all the gain on new home is excluded.  168,000 gain. Is this

correct?  Working through the calculations, it appears that the original $500,000 exclusion was reduced

by gain on 1st home, and then 2nd home gain was not enough to use up all the exclusion and it was

all excluded.  Assuming this is correct, is the basis on the new house (3rd one) reduced by both the gain on 1st house and second house?  Does the $500,000 exclusion start over again after 2 years residency 

in new house?

[qbteachmt]

"According to the calculations all the gain on new home is excluded."

Where did you figure that calculation?

"Working through the calculations, it appears that the original $500,000 exclusion was reduced by gain on 1st home, and then 2nd home gain was not enough to use up all the exclusion"

Where do you see that is a carryover limit?

"Lived in 2nd home 16 months."

So, does not qualify for primary residence living there for 2 out of 5 years of ownership.

"due to unforseen circumstances."

Have you confirmed with the IRS list if that qualifies for the exception from taxable gain, at least partially?

"Assuming this is correct, is the basis on the new house (3rd one) reduced by both the gain on 1st house and second house?"

Are you reading something from 30 years ago, or current materials? Try these:

https://www.irs.gov/newsroom/important-tax-reminders-for-people-selling-a-home

https://www.irs.gov/businesses/small-businesses-self-employed/sale-of-residence-real-estate-tax-tips

https://www.irs.gov/taxtopics/tc701

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

(the pub covers Unforeseeable Events)

[pamdory]

The reduced exclusion calculation is a proration of the full-exclusion, using the smaller of the months (or days) the residence meets the ownership & use requirements or the months (or days) since the last sale that the taxpayer used a Sec 121 exclusion.  So for 16 months the exclusion would be $500,000 x 16/24 = $333,333.  That's why the second gain was excluded.

Section 121 is an exclusion, not a deferral.  So the basis is not affected by prior sales.

[qbteachmt]

"Section 121 is an exclusion, not a deferral. So the basis is not affected by prior sales."

Nicely stated. It appears the second home sale doesn't meet the ownership or look-back requirements for exclusion, but it might meet "unforeseen circumstances" for partial exclusion.

The third home is a whole new situation, and their residency and ownership clock just restarted. Its basis stands alone. There is no carryover.

I believe the references here are what changed in 1997.