[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.121-3T]

[Page 510-514]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.121-3T  Reduced maximum exclusion for taxpayers failing to meet 
certain requirements (temporary).

    (a) [Reserved] For further guidance, see Sec. 1.121-3(a).
    (b) Primary reason for sale or exchange. In order for a taxpayer to 
claim a reduced maximum exclusion under section 121(c), the sale or 
exchange must be by reason of a change in place of employment, health, 
or unforeseen circumstances. A sale or exchange is by reason of a change 
in place of employment, health, or unforeseen circumstances only if the 
primary reason for the sale or exchange is a change in place of 
employment (within the meaning of paragraph (c) of this section), health 
(within the meaning of paragraph (d) of this section), or unforeseen 
circumstances (within the meaning of paragraph (e) of this section). 
Whether the requirements of this section are satisfied depends upon all 
the facts and circumstances. If the taxpayer qualifies for a safe harbor 
described in this section, the taxpayer's primary reason is deemed to be 
a change in place of employment, health, or unforeseen circumstances. If 
the taxpayer does not qualify for a safe harbor, factors that may be 
relevant in determining the taxpayer's primary reason for the sale or 
exchange include (but are not limited to) the extent to which--
    (1) The sale or exchange and the circumstances giving rise to the 
sale or exchange are proximate in time;
    (2) The suitability of the property as the taxpayer's principal 
residence materially changes;
    (3) The taxpayer's financial ability to maintain the property 
materially changes;
    (4) The taxpayer uses the property as the taxpayer's residence 
during the period of the taxpayer's ownership of the property;
    (5) The circumstances giving rise to the sale or exchange are not 
reasonably foreseeable when the taxpayer begins

[[Page 511]]

using the property as the taxpayer's principal residence; and
    (6) The circumstances giving rise to the sale or exchange occur 
during the period of the taxpayer's ownership and use of the property as 
the taxpayer's principal residence.
    (c) Sale or exchange by reason of a change in place of employment--
(1) In general. A sale or exchange is by reason of a change in place of 
employment if, in the case of a qualified individual described in 
paragraph (f) of this section, the primary reason for the sale or 
exchange is a change in the location of the individual's employment.
    (2) Distance safe harbor. The primary reason for the sale or 
exchange is deemed to be a change in place of employment (within the 
meaning of paragraph (c)(1) of this section) if--
    (i) The change in place of employment occurs during the period of 
the taxpayer's ownership and use of the property as the taxpayer's 
principal residence; and
    (ii) The individual's new place of employment is at least 50 miles 
farther from the residence sold or exchanged than was the former place 
of employment, or, if there was no former place of employment, the 
distance between the individual's new place of employment and the 
residence sold or exchanged is at least 50 miles.
    (3) Employment. For purposes of this paragraph (c), employment 
includes the commencement of employment with a new employer, the 
continuation of employment with the same employer, and the commencement 
or continuation of self-employment.
    (4) Examples. The following examples illustrate the rules of this 
paragraph (c):

    Example 1. A is unemployed and owns a townhouse that she has owned 
and used as her principal residence since 2002. In 2003 A obtains a job 
that is 54 miles from her townhouse, and she sells the townhouse. 
Because the distance between A's new place of employment and the 
townhouse is at least 50 miles, the sale is within the safe harbor of 
paragraph (c)(2) of this section and A is entitled to claim a reduced 
maximum exclusion under section 121(c)(2).
    Example 2. B is an officer in the United States Air Force stationed 
in Florida. B purchases a house in Florida in 2001. In May 2002 B moves 
out of his house to take a 3-year assignment in Germany. B sells his 
house in January 2003. Because B's new place of employment in Germany is 
at least 50 miles farther from the residence sold than is B's former 
place of employment in Florida, the sale is within the safe harbor of 
paragraph (c)(2) of this section and B is entitled to claim a reduced 
maximum exclusion under section 121(c)(2).
    Example 3. C is employed by Employer R at R's Philadelphia office. C 
purchases a house in February 2001 that is 35 miles from R's 
Philadelphia office. In May 2002 C begins a temporary assignment at R's 
Wilmington office that is 72 miles from C's house, and moves out of the 
house. In June 2004 C is assigned to work in R's London office, and as a 
result, sells her house in August 2004. The sale of the house is not 
within the safe harbor of paragraph (c)(2) of this section by reason of 
the change in place of employment from Philadelphia to Wilmington 
because the Wilmington office is not 50 miles farther from C's house 
than is the Philadelphia office. Furthermore, the sale is not within the 
safe harbor by reason of the change in place of employment to London 
because C is not using the house as her principal residence when she 
moves to London. However, C is entitled to claim a reduced maximum 
exclusion under section 121(c)(2) because, under the facts and 
circumstances, the primary reason for the sale is the change in C's 
place of employment.
    Example 4. In July 2002 D buys a condominium that is 5 miles from 
her place of employment and uses it as her principal residence. In 
February 2003 D, who works as an emergency medicine physician, obtains a 
job that is located 51 miles from D's condominium. D may be called in to 
work unscheduled hours and, when called, must be able to arrive at work 
quickly. Therefore, D sells her condominium and buys a townhouse that is 
4 miles from her new place of employment. Because D's new place of 
employment is only 46 miles farther from the condominium than is D's 
former place of employment, the sale is not within the safe harbor of 
paragraph (c)(2) of this section. However, D is entitled to claim a 
reduced maximum exclusion under section 121(c)(2) because, under the 
facts and circumstances, the primary reason for the sale is the change 
in D's place of employment.

    (d) Sale or exchange by reason of health--(1) In general. A sale or 
exchange is by reason of health if the primary reason for the sale or 
exchange is to obtain, provide, or facilitate the diagnosis, cure, 
mitigation, or treatment of disease, illness, or injury of a qualified 
individual described in paragraph (f) of this section, or to obtain or 
provide medical or personal care for a

[[Page 512]]

qualified individual suffering from a disease, illness, or injury. A 
sale or exchange that is merely beneficial to the general health or 
well-being of the individual is not a sale or exchange by reason of 
health.
    (2) Physician's recommendation safe harbor. The primary reason for 
the sale or exchange is deemed to be health if a physician (as defined 
in section 213(d)(4)) recommends a change of residence for reasons of 
health (as defined in paragraph (d)(1) of this section).
    (3) Examples. The following examples illustrate the rules of this 
paragraph (d):

    Example 1. In 2002 A buys a house that she uses as her principal 
residence. A is injured in an accident and is unable to care for 
herself. As a result, A sells her house in 2003 and moves in with her 
daughter so that the daughter can provide the care that A requires as a 
result of her injury. Because, under the facts and circumstances, the 
primary reason for the sale of A's house is A's health, A is entitled to 
claim a reduced maximum exclusion under section 121(c)(2).
    Example 2. H's father has a chronic disease. In 2002 H and W 
purchase a house that they use as their principal residence. In 2003 H 
and W sell their house in order to move into the house of H's father so 
that they can provide the care he requires as a result of his disease. 
Because, under the facts and circumstances, the primary reason for the 
sale of their house is the health of H's father, H and W are entitled to 
claim a reduced maximum exclusion under section 121(c)(2).
    Example 3. H and W purchase a house in 2002 that they use as their 
principal residence. Their son suffers from a chronic illness that 
requires regular medical care. Later that year their doctor recommends 
that their son begin a new treatment that is available at a medical 
facility 100 miles away from their residence. In 2003 H and W sell their 
house to be closer to the medical facility. Because, under the facts and 
circumstances, the primary reason for the sale is to facilitate the 
treatment of their son's chronic illness, H and W are entitled to claim 
a reduced maximum exclusion under section 121(c)(2).
    Example 4. B, who has chronic asthma, purchases a house in Minnesota 
in 2002 that he uses as his principal residence. B's doctor tells B that 
moving to a warm, dry climate would mitigate B's asthma symptoms. In 
2003 B sells his house and moves to Arizona to relieve his asthma 
symptoms. The sale is within the safe harbor of paragraph (d)(2) of this 
section and B is entitled to claim a reduced maximum exclusion under 
section 121(c)(2).
    Example 5. In 2002 H and W purchase a house in Michigan that they 
use as their principal residence. H's doctor tells H that he should get 
more exercise, but H is not suffering from any disease that can be 
treated or mitigated by exercise. In 2003 H and W sell their house and 
move to Florida so that H can increase his general level of exercise by 
playing golf year-round. Because the sale of the house is merely 
beneficial to H's general health, the sale of the house is not by reason 
of H's health. H and W are not entitled to claim a reduced maximum 
exclusion under section 121(c)(2).

    (e) Sale or exchange by reason of unforeseen circumstances--(1) In 
general. A sale or exchange is by reason of unforeseen circumstances if 
the primary reason for the sale or exchange is the occurrence of an 
event that the taxpayer does not anticipate before purchasing and 
occupying the residence.
    (2) Specific event safe harbors. The primary reason for the sale or 
exchange is deemed to be unforeseen circumstances (within the meaning of 
paragraph (e)(1) of this section) if any of the events specified in 
paragraphs (e)(2)(i) through (iii) of this section occur during the 
period of the taxpayer's ownership and use of the residence as the 
taxpayer's principal residence--
    (i) The involuntary conversion of the residence;
    (ii) Natural or man-made disasters or acts of war or terrorism 
resulting in a casualty to the residence (without regard to 
deductibility under section 165(h));
    (iii) In the case of a qualified individual described in paragraph 
(f) of this section--
    (A) Death;
    (B) The cessation of employment as a result of which the individual 
is eligible for unemployment compensation (as defined in section 85(b));
    (C) A change in employment or self-employment status that results in 
the taxpayer's inability to pay housing costs and reasonable basic 
living expenses for the taxpayer's household (including amounts for 
food, clothing, medical expenses, taxes, transportation, court-ordered 
payments, and expenses reasonably necessary to the production of income, 
but not for the maintenance of an affluent or luxurious standard of 
living);

[[Page 513]]

    (D) Divorce or legal separation under a decree of divorce or 
separate maintenance; or
    (E) Multiple births resulting from the same pregnancy; or
    (iv) An event determined by the Commissioner to be an unforeseen 
circumstance to the extent provided in published guidance of general 
applicability or in a ruling directed to a specific taxpayer.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (e):

    Example 1. In 2003 A buys a house in California. After A begins to 
use the house as her principal residence, an earthquake causes damage to 
A's house. A sells the house in 2004. The sale is within the safe harbor 
of paragraph (e)(2)(ii) of this section and A is entitled to claim a 
reduced maximum exclusion under section 121(c)(2).
    Example 2. H works as a teacher and W works as a pilot. In 2003 H 
and W buy a house that they use as their principal residence. Later that 
year W is furloughed from her job for six months. H and W are unable to 
pay their mortgage during the period W is furloughed. H and W sell their 
house in 2004. The sale is within the safe harbor of paragraph 
(e)(2)(iii)(C) of this section and H and W are entitled to claim a 
reduced maximum exclusion under section 121(c)(2).
    Example 3. In 2003 H and W buy a two-bedroom condominium that they 
use as their principal residence. In 2004 W gives birth to twins and H 
and W sell their condominium and buy a four-bedroom house. The sale is 
within the safe harbor of paragraph (e)(2)(iii)(E) of this section, and 
H and W are entitled to claim a reduced maximum exclusion under section 
121(c)(2).
    Example 4. B buys a condominium in 2003 and uses it as his principal 
residence. B's monthly condominium fee is $X. Three months after B moves 
into the condominium, the condominium association decides to replace the 
building's roof and heating system. Six months later, B's monthly 
condominium fee doubles. B sells the condominium in 2004 because B is 
unable to pay the new condominium fee along with the monthly mortgage 
payment. The safe harbors of paragraph (e)(2) of this section do not 
apply. However, under the facts and circumstances, the primary reason 
for the sale is unforeseen circumstances, and B is entitled to claim a 
reduced maximum exclusion under section 121(c)(2).
    Example 5. In 2003 C buys a house that he uses as his principal 
residence. The property is located on a heavily trafficked road. C sells 
the property in 2004 because the traffic is more disturbing than he 
expected. C is not entitled to claim a reduced maximum exclusion under 
section 121(c)(2) because the safe harbors of paragraph (e)(2) of this 
section do not apply and, under the facts and circumstances, the traffic 
is not an unforeseen circumstance.
    Example 6. In 2003 D and her fiance E buy a house and live in it as 
their principal residence. In 2004 D and E cancel their wedding plans 
and E moves out of the house. Because D cannot afford to make the 
monthly mortgage payments alone, D and E sell the house in 2004. The 
safe harbors of paragraph (e)(2) of this section do not apply. However, 
under the facts and circumstances, the primary reason for the sale is 
unforeseen circumstances, and D and E are each entitled to claim a 
reduced maximum exclusion under section 121(c)(2).

    (f) Qualified individual. For purposes of this section, qualified 
individual means--
    (1) The taxpayer;
    (2) The taxpayer's spouse;
    (3) A co-owner of the residence;
    (4) A person whose principal place of abode is in the same household 
as the taxpayer; or
    (5) For purposes of paragraph (d) of this section, a person bearing 
a relationship specified in sections 152(a)(1) through 152(a)(8) 
(without regard to qualification as a dependent) to a qualified 
individual described in paragraphs (f)(1) through (4) of this section, 
or a descendant of the taxpayer's grandparent.
    (g) [Reserved]. For further guidance, see Sec. 1.121-3(g).
    (h) Election to apply regulations retroactively. Taxpayers who would 
otherwise qualify under this section to exclude gain from a sale or 
exchange before December 24, 2002 but on or after May 7, 1997, may elect 
to apply all of the provisions of this section for any years for which 
the period of limitations under section 6511 has not expired. The 
taxpayer makes the election under this paragraph (h) by filing a return 
for the taxable year of the sale or exchange that does not include the 
gain from the sale or exchange of the taxpayer's principal residence in 
the taxpayer's gross income. Taxpayers who have filed a return for the 
taxable year of the sale or exchange may elect to apply all the 
provisions of this section for any years for which the period of 
limitations under section 6511 has

[[Page 514]]

not expired by filing an amended return.
    (i) through (j) [Reserved]. See Sec. 1.121-3(i) through (j).
    (k) Audit protection. The Internal Revenue Service will not 
challenge a taxpayer's position that a sale or exchange of a principal 
residence that occurred before December 24, 2002 but on or after May 7, 
1997, qualifies for the reduced maximum exclusion under section 121(c) 
if the taxpayer has made a reasonable, good faith effort to comply with 
the requirements of section 121(c) and if the sale or exchange otherwise 
qualifies under section 121.
    (l) Effective date. For the applicability of this section, see Sec. 
1.121-3(l).

[T.D. 9031, 67 FR 78369, Dec. 24, 2002]