Discussion:2 Year Requirement Met for Homeowner Exclusion?

Want to make sure client stays in house another year if necessary since close to $100,000 of gain potential.

IRC 121 doesn't appear definitive to me on this, or the related Reg.

The land is the exact same. There is only one parcel that has been homesteaded since 1999 and lived in. The trailer was of no value and disposed to move into the house. Workplace remained the same, address for all purposes is the same too.

Would anyone agree that although no specific examples in the Regs address the situation I have, that the language of Reg 1.121-(b)(2) would allow the exemption?

While the code is actually silent on this issue, the fact that you can separately sell the house and the land (in the case of adjoinging property) up to 2 years after the fact and exclude all the gain leads me to conclude this is more about dirt than lumber.

The trailer was used as his primary residence which is on his land. Just like a 4 room ranch would be on his land.

If I have 100 acres and I lived in a home on the property for 10 years and I built a house right next to it and tore down the original home. Then I decided to move Why would that matter? The address is still my primary residence.

Why would it be any different if I tore the home I was living in down and stayed with a relative while it was rebuilt. Then sold it.

In all of the above I have lived at this location for the last 2 out of 5 years, I have owned my home on my land and I considered it my primary residence

The client actually built the home himself so has a substantial amount of sweat equity involved. Most of the gain would reside with the new home, not the land and previous trailer.

I am thinking this may be something the client can decide whether to pursue aggressively, since the statutes are not specific enough to get a clear cut answer. The easiest answer of course is to stay there another year, but if he gets a good offer I'm sure he'll take it.

In order to cushion any potential negative effects, would it be best to estimate tax on gain if determined to be taxable and advise client to place that money in the bank for the statute period? I figured three years initially, but could be as many as six since IRS could consider it underreporting of income by greater than 25%.

The trailer was used as his primary residence which is on his land. Just like a 4 room ranch would be on his land."

As I see it, the problem is that he did not sell the trailer, but a house he constructed. There were stories in our local papers of a man who lives in an old station wagon on his land. Suppose it had been a teepee. Would that change the answer? I rather think it would.

Ten years of law and this type of issue has yet to be addressed. It will cost $946, or would have last year, to get a letter ruling.

Who knows though, maybe the IRS will be having a generous day and allow this for him....

There was never a point in time when there was no home for him to live in, where there would have only been raw land.

I guess I would argue the point with the IRS, if necessary, that the taxpayer's "home" never really changed since it was the same address, location, etc. as stated in the Reg's definition at Reg 1.121-(b)(2).

That situation is very different from the person who has five properties and slowly liquidates each under 121 by using the two of five rule because in each case, the properties existed before he moved into them.

The facts of this OP's case are significantly different, and I would expect that we shall never know. What is funny here is under our new requirements, where is the MLTN bright line?

I read the Committee Reports from passage of TRA 1997 and there is no smoking gun there either: 'a taxpayer must have owned the residence and occupied it as a principal residence for at least two of the five years prior to the sale or exchange.' In our instant case, he has owned the land, that is for sure. It comes down to 'has he owned the residence that he sold for the two years?'

I used 'appurtenant' more as a joke than anything. The trailer was certainly a dwelling, but the fact is that it is gone.

Yet I would feel comfortable on the MLTN front because IRS will not make advanced rulings, as Greg notes.

I really appreciate all the great input from everyone on here. My client is going to be very happy to know that there are several professionals providing input on this quite vague issue.

Please feel free to let me know if you see anything else that may fit this discussion.

Thanks!

But the original house was removed once the new house was in move in condition. I guess the hard part with this too is that there was a trailer with little to no value that is much more easily removed than a stick-built house.

Intuitively, I agree with you Dennis, but I also enjoy digging into the statutes to find any potential advantages for my client - I really do think that I have found one with the fact that the code and Regs do not really speak to the specific issue that I have in any definitive terms.