September 29, 2004

Hi Everybody,

I didn’t think the next communication would come so quickly after my introductory email, but I did run across something the other day that I thought would be of interest.

First, I just want to quickly point out that my email address is james@mccuskerassociates.com. The last email I sent you was from a special account, so please use the "James" one.

On August 13th the Internal Revenue Service (IRS) issued final regulations (Reg. 1.121-3) regarding a reduced maximum exclusion of gain on the sale of a personal residence. As always, if you own and occupy a personal residence for 2 years out of the 5 years preceding its sale, you can exclude up to $250,000 of the gain from taxation ($500,000 if married filing joint).

Under the old/temporary regulations, this exclusion could be prorated if your ownership/occupancy period was shortened due to events beyond your control. The circumstances that qualified for this treatment included things like job change, health reasons and unforeseen circumstances. The problem with the temporary regulations was that they never defined what constituted “unforeseen circumstances.” You were told to refer to the IRS definition for guidance; as it turns out the definition did not yet exist (I too was shocked). So if you had to sell the residence prematurely due to a reason other than job change or health you were out of luck.

Now the new regulation cures this problem by giving us a listing of what actually constitutes an “unforeseen circumstance.” And included in the list of unexpected events is divorce or legal separation under a decree of divorce or separate maintenance. So now if a marital residence is sold incident to divorce prior to the 2-year holding period having expired, some relief is available. Generally the prorated exclusion will be determined by multiplying the full $250,000 exclusion by a ratio determined by dividing the number of months/days that the residence was owned/occupied by a denominator of 24 mos./730 days. I’ve included a typical example below to help clarify the calculation.

I hope this was of value and as always I welcome your questions and feedback.

All the Best

Jim McCusker

REDUCED MAXIMUM EXCLUSION ON SALE OF MARITAL RESIDENCE EXAMPLE

Husband and Wife divorce but remain joint owners of the marital residence. The Husband vacates the marital residence and subsequently purchases his own home. The marital residence continues to be owned jointly until the youngest child is emancipated 8 years later. At that time the marital marital residence is sold at a gain of $400,000. In the interim the Husband has sold his home 10 mos earlier at a gain of $100,000 and used the exclusion of gain provisions to pay no taxes on the sale.