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My wife and I moved into rental property in June 1997 intending to live in it 2 years while we built a new home, and avoid capital gains on the rental when sold.

We will be moving to the new home by April 01, 2000. We have a contract on the rental, the new owners are pushing to close the sale next week (First week of February '00) in order to avoid chance of rate hike.

We had been led to believe that if we did not stay in the rental the full 2 years, that the capital gains taxes would be prorated. In this instance we expected approximately 20/24 th's avoidance. Now my accountant tells me it's "all (24) or none".

Sale,and proration, due to "unforeseen circumstances", evidently are allowed.

Can someone help me as to the reality of prorating or,what are "unforeseen circumstances" ? Perhaps some examples.

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<< My wife and I moved into rental property in June 1997 intending to live in it 2 years while we built a new home, and avoid capital gains on the rental when sold.

We will be moving to the new home by April 01, 2000. We have a contract on the rental, the new owners are pushing to close the sale next week (First week of February '00) in order to avoid chance of rate hike.

We had been led to believe that if we did not stay in the rental the full 2 years, that the capital gains taxes would be prorated. In this instance we expected approximately 20/24 th's avoidance. Now my accountant tells me it's "all (24) or none".

Sale,and proration, due to "unforeseen circumstances", evidently are allowed. Can someone help me as to the reality of prorating or,what are "unforeseen circumstances" ? >>

If you made this home your principal residence in June 1997, you've already met the 2 year period and have nothing to worry about. If that was a typo, and you've only been there since June 1998, your out of luck unless you stay there for the full 2 years.

The exceptions relate to a change in health or jobs. Period.

Phil Marti
Tax Preparer
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<<Sale,and proration, due to "unforeseen circumstances", evidently are allowed. Can someone help me as to the reality of prorating or,what are "unforeseen circumstances" ? >>

In his response, Phil indicates that the exceptions are due to health and job issue. Period.

I don't think that I necessarily agree that health and job issues are the ONLY exceptions. As was pointed out, "unforseen circumstances" enter into the mix.

The code says so...as follows "such sale or exchange is by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances."

It would seem logical to go to the regulations to find out what Uncle Sammy means by "unforseen circumstances". Problem is that the regs don't identiry any "unforseen circumstances" per se...cause none have been written yet.

So the next best area of guidance is the IRS Publications. If you read that publication, there is NO REFERENCE to "unforeseen circumstances". So if you go directly by the Pub, Phil's original statement would be correct.

I would like to go by the code...but since there are no regulations written, we have no definition of "unforseen" circumstances.

Is it a problem? Sure. We don't know what might constitute such circumstances. Divorce? Possibly. Damage or destruction from fire or flood? Possibly. Tired of the color of the carpet? Certainly not. So it's an interpretation issue...where the tax pro (or individual) has to make some judgement calls. I would LOVE to know what, if anything, would be considered unforeseen circumstances. But until the regulations are issued, all we can do is the best we can do.

I've discussed this issue in the folder in prior posts. You might want to do a folder search for additional information. Or you can read more about this in the Taxes FAQ area.

TMF Taxes
Roy
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<< The code says so...as follows "such sale or exchange is by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances." >>

Thanks to Roy for his discussion of "unforeseen circumstances." I would have to assume that the IRS, probably like the original poster's CPA, would not consider building a new house to be an unforeseen circumstance.

As for the courts, who knows? This is another example of a carefully crafted statute brought to you by the politicians who will soon be on your airwaves griping about those pointy-headed bureaucrats in Washington, the same people that, in this instance, they delegated their job to. The courts have been known to look to Congressional committee reports to divine Congressional intent, but some members of the Judiciary, most notably Justice Scalia, are sick and tired of sloppy lawmaking and are demanding adherence to the plain language of the statute. IRS would probably argue that absent regulations there can be no "unforeseen circumstances," given the wording of the law.

If the original poster is so inclined, a look at the committee report on the bill might be worthwhile. I don't remember the Public Law number, but this provision was in the big 1997 tax bill, which can be found at http://thomas.loc.gov

Phil Marti
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