The IRS determined that a taxpayer was entitled to a partial gain exclusion even though the taxpayer used the property for less than two years. The taxpayer did not meet the requirements of the IRS code, however, they sold the residence due to an unforeseen circumstance which allowed them to qualify for the partial exclusion of gains from the sale of their residence.

  1. Gains on the sale of a personal residence are taxed as capital gains.
  2. Gains of $250,000 and less for an individual and $500,000 and less for a married couple are excluded from taxation ONLY if the taxpayer owned and used the residence for periods totaling two of the last five years called the “two year use” rule.


  • A married couple with one child bought a two bedroom and two bath condo.
    • The second bedroom was used as the child’s room, a home office, and other uses.
  • The wife then gave birth to a second child and the couple moved out of the condo and later sold it.
  • The IRS said that the birth of the second child made the condo unsuitable as a residence for the family and was an unforeseen circumstance.
    • Other unforeseen circumstances include death, divorce, unemployment compensation, multiple births resulting from the same pregnancy, damage to the residence, a man-made disaster, act of war or terrorism, change in employment leaving a taxpayer unable to pay a mortgage or reasonable living expenses, and more.
  • The IRS determination in regards to this specific taxpayer was provided via a “private letter ruling” which binds both the IRS and taxpayer on the IRS guidance on a specific tax issue, but only those parties.
    • So, this specific letter from the IRS could not be cited as precedent by other taxpayers.
    • However, if the IRS takes out personal contents of the private letter ruling for a taxpayer and issues it as what is called a “revenue ruling”, then the tax issue guidance or determination would becoming binding on all taxpayers and the IRS.