Sec 121 partial exclusion for military

[AV1]

I am trying to figure out if a partial capital gain exclusion is applicable in this case:

TP Purchased a primary residence in Jan. 2001.  Lived in the residence until July 2005.  Moved due to military PCS and converted the residence to a rental property.  Never came back to the residence and sold in September of 2018. 

I accounted for the 10 year suspension period which took the "sale" date back to Sep. 2008.  The 5 year test period goes back to Sep. 2003.  TP does not meet the 24month residency requirement (short by two months).  Does a partial exclusion apply in this case?  If so, is work-related move would be considered the basis for the partial exclusion?

Thank you.

[itonewbie · Accepted solution]

I stand corrected after reading the code, regs, and legislative history again.  I agree with Bill that the taxpayer should be entitled to a partial exclusion pursuant to §121(c) and that §§1.121-3(c) is the subsection that governs the application.

When §§1.121-3T was published, it was stipulated in paragraph (b) that reduced exclusion would apply "only if the primary reason for the sale or exchange is... a change in place of employment..., health..., or unforeseen circumstances."  The IRS was specific, with the promulgation of the final regulations, about their intent to remove the "primary reason" test where one of the safe harbors applies and that such sale or exchange will "be deemed to be by reason of a change in place of employment, health, or unforeseen circumstances."  This means the facts and circumstance factors listed under §1.121-3(b) will not be relevant so long as the safe harbor rules are met.

Since the taxpayer in this case sold the home by reason of a change in place of employment should qualify for the safe harbor under §§1.121-3(c)(2), when read in conjunction with subparagraphs (1) and (3), the sale would be deemed to be by reason of a change in place of employment and the taxpayer should qualify for the reduced exclusion, taking into account the following periods (give or take a month since it is not clear whether the cutoff was end of Aug or sometime in Sep)-

• Jan 2001 to Jul 2005: Ownership & Use
• Aug 2005 to Sep 2018: PCS
• Oct 2008 to Sep 2018: Suspension period
• Oct 2003 to Sep 2008: 5-year Ownership Period
• Oct 2003 to Jul 2005: 22 Months Period of Use

In addition, we will need to consider §121(b)(5) for potential exclusion of gain for nonqualified use.  By means of §121(b)(5)(c)(i) and (ii)(II), nevertheless, it would appear that there should not be any period of nonqualified use.

• Period of Ownership: Jan 2001 to Sep 2018: 213 Months
• Period of Nonqualified Use: Aug 2005 to Sep 2018
• Pre-2009 Period: Aug 2005 to Dec 2008
• Exception: Jan 2009 to Sep 2018: 117 Months

Note, however, any gain realized would still be subject to unrecaptured §1250.

[AV1]

Thank you all for your input.  I have been reading, and rereading the regs and my understanding is that the TP qualifies for the partial exclusion.  

[TaxGuyBill]

Yes, they qualify for the exclusion.  I disagree with TaxMonkey and itonewbie.

1)  Assuming the taxpayer was in the military the entire time, the period is extended by 10 years, not to 10 years.  So it would be a 15 year period.

2) Assuming it meets the 50 mile criteria, it was a "change in place of employment".  That is a "safe harbor" so §1.121-3(b)(1) does not apply, so the long period between moving out and selling it does not matter.

[TaxMonkey]

"A sale or exchange is by reason of a change in place of employment if, in the case of a qualified individual described in paragraph (f) of this section, the primary reason for the sale or exchange is a change in the location of the individual's employment"

You really feel like you could argue with a strait face that the primary reason for the sale in Sept of 2018, was that the taxpayer had to change work locations back in July of 2005?  I guess I need to work on my poker face.

[TaxGuyBill]

Now read the next paragraph about the Safe Harbor in that Reg.

[TaxMonkey]

sure I concede the distance portion of the safe harbor is met.  That doesn't mean you can ignore the rest.  Parts 1, 2 and 3 are all part of the change of employment safe harbor.

[TaxGuyBill]

Read it again. It says what you just cited in (1) will be met ("deemed") if the distance test is met.

And I disagree about your comment that all of (c) is part of the employment Safe Harbor.

[Accountant-Man]

The way I read it: The period from August 2005 through July 2015 is removed, ASSUMING that he was in the military for all 10 years, so he had 36 months from July 2015 to have a 60 month look back that included 24 months of residence. If he sold it before August 2018 (we don't know the actual day, and it doesn't matter).

He sold it September 2018. Too late to claim anything. In the 60 month test period he lived in it 22 or 23 months. No exclusion.

The military suspension is for the 60 month test period. Since he lived in it for many months through July 2005 (more than 24), 24 of those count in the 60 months. Then he left, but the test period is suspended while he is on qualified official extended duty. IF that lasted until July 2015, then the test counting begins again. 60 - 24 = 36.

[TaxMonkey]

The sale happened in 2018, and you want to suggest that he sold it because he had to move back in 2005?  He decided to rent the property in 2005, not sell it.  I would not consider a partial exclusion in this case.  See 1.121-3(b)(1) in particular.

[AV1]

Thank you for your comment.  I do not suggest that he sold the property because he had to move back.  I am trying to figure out if a partial exclusion will apply in combination with the "stop the clock" rule.  So your understanding is that if a TP does not meet the 24month requirement then no exclusion is allowed?

[AV1]

I am looking at 1.121-3 (4) Examples and it actually sounds that the partial exclusion could apply in this case.

[TaxMonkey]

The partial exclusion exists for people who do not meed the 24 month requirement.  It is just that in your case 1) it doesn't seem like he meets the requirements for a partial exclusion and 2) even if he did the exclusion would be zero, because in the 10 year period (extended due to military service) between Sept 2008 and Sept 2018, the taxpayer lived in the home for 0 months.

[TaxMonkey]

which example in particular do you feel like would support a partial exclusion for a job transfer that happened 13 years ago?

[itonewbie]

Please disregard this and see the latest response.

[AV1]

TP was overseas and just recently returned to the States.  And that's when he was able to sell the property.