Sale of primary residence, partial exclusion

[mcd1231]

I have read and reread Pub.523 and I can't come to a conclusion.  My client purchased a home on Aug 1, 2019.  It was discovered there was asbestos in the home. She had it removed and then sold the home.  She only lived there for 17 months. 

Can the finding of asbestos be seen as an unforeseeable event therefore making her eligible for a partial exclusion of the gain?

Thank you

[GodFather]

I'll take a shot at this, although I'm not 100% sure and advise you wait for others to chime in.

Her intent was to live there for at least 2 years, right?  The asbestos caused that time frame to change. Did she know the asbestos was there?  I'll assume she didn't.  I would look at taking the partial exclusion. 

[Jim-from-Ohio]

According to this, yes

Unforeseeable Events

You meet the standard requirements if any of the following events occurred during the time you owned and lived in the home you sold.

• Your home was destroyed or condemned.

• Your home suffered a casualty loss because of a natural or man-made disaster or an act of terrorism. (It doesn’t matter whether the loss is deductible on your tax return.)

• You, your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence:

  1. Died;

  2. Became divorced or legally separated;

  3. Gave birth to two or more children from the same pregnancy;

  4. Became eligible for unemployment compensation;

  5. Became unable, because of a change in employment status, to pay basic living expenses for the household (including expenses for food, clothing, housing, medication, transportation, taxes, court-ordered payments, and expenses reasonably necessary for making an income).

  6. An event is determined to be an unforeseeable event in IRS published guidance.

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.

[dkh]

I agree with Godfather. 

If the client did not know the asbestos was there before purchasing or occupying the residence, then it was an unforeseen circumstance.  Does the client have documentation for an inspection that discovered the asbestos ? 

[BobKamman]

"It was discovered . . ."  The alarms are always sounded when the passive voice is used.  By whom?  There was no inspection before closing?  

Did she move out while the asbestos was being removed?  When did that work start and end?  She would have a better case if she had sold it "as is" to a buyer who could deal with the asbestos. 

[TaxGuyBill]

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@mcd1231 wrote:

 She had it removed and then sold the home. 

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If she had it removed, why was the asbestos a reason for the sale?

[mcd1231]

She didn't want to stay there even though the asbestos was removed.  Neither would I for that matter!

[mcd1231]

You are right.  She did not know the asbestos was there.  She would have never bought it if she did.

[mcd1231]

Yes she has proof.  She did not know about the asbestos until after she lived there and not before the sale.

[BobKamman]

Again, where was she living while the work was done?  

An IRS audit is unlikely unless she has a vengeful ex. But the first question asked would be, when was this discovered?  She says, not until she moved in.  But is there evidence that it was a known fixer-upper and she saw that it could be sold at a profit once the work was done.  Of course, she could be an influencer with videos on "how I made money buying a house with asbestos that I didn't even know about."