Home-sale profit tax exclusion triggered by birth of second child

IRS Letter Ruling 200745011

A husband and wife had one child when they purchased their residence. After the purchase, the wife became pregnant and gave birth to a second child. In less than two years after the purchase, the husband and wife sold the residence at a profit and bought a larger house to accommodate the addition of the second child to the household. For tax reporting purposes, profit on the sale or exchange of property must be included in the husband and wife’s gross income unless excluded by the husband and wife residing in the residence for two of the five years preceding the sale. However, the IRS is authorized to address specific instances where the sale of a principal home is primarily due to an unforeseen circumstance which would then allow a pro rata amount of the total $250,000 exclusion to be used to avoid the reporting of part or all of the profit. Here, the IRS ruled the birth of the second child was an unforeseen circumstance causing the sale of the principal residence. Thus the profit from the sale up to the pro rata amount of the exclusion allowed for the time it was owned and occupied did not need to be included in the gross income. [Tax Benefits of Ownership, 2nd edition, “The principal residence profit exclusion”, 2006, 13-20]

Changes to 1040 for 2007

Taxpayers may include the mortgage credit insurance (PMI) premium as a standard itemized deduction if paid and accrued during 2007. PMI includes insurance provided by:

  • the Veterans Administration;
  • the Federal Housing Administration (MIP);
  • the Rural Housing Administration; or
  • private mortgage insurance (PMI). [Tax Benefits of Ownership, 2nd edition, “Home loan interest deductions”, 2006, 3-6]