The Internal Revenue Service has deemed the events of September 11, 2001 an "unforeseen event" that allows certain home sellers to avoid taxes on a portion of the profit when they sell their home -- even if they don't meet owner-occupied residency requirements otherwise necessary to avoid capital gains taxes.

The Taxpayer Relief Act of 1997 says when you sell your home, if you qualify, you can keep, tax free, capital gains of up to $500,000 if you are married filing jointly or $250,000 for single taxpayers, or married taxpayers who file separately. To qualify for the exclusion, the home must have been your primary residence for at least two of the prior five years.

A related law also makes provisions for you if, through some unforeseen event, such as a job change, illness, or other hardship, you are forced to sell before you meet the two-year residency requirement. The federal Internal Revenue Service Restructuring and Reform Act of 1998 says you can prorate the $500,000/$250,000 exclusion (not your specific gain) if you are forced to sell early.

That means if you only live in your home a year before you are forced to sell, you can exclude from taxes up to $250,000 in capital gains if you are married and file jointly or $125,000 for separate and single filers.

Last week, the IRS and the U.S. Treasury Department issued an interim home sale tax exclusion regulation that says home sellers affected by the September 11, 2001 acts of terrorism in New York, Pennsylvania and Washington, D.C. are eligible to exclude from taxes some of any gain from a home sale even if they don't meet residency requirements provided

1. A spouse, home co-owner, or person living with the taxpayer was killed by the attacks.
2. The taxpayer's principal residence was damaged.
3. The taxpayer or a person listed in (1) became eligible for unemployment compensation, or
4. The taxpayer or a person listed in (1) had a change in employment or self-employment that resulted in the taxpayer’s inability to pay reasonable basic living expenses for the household.

Those who qualify can prorate a portion of the exclusion depending upon how long they were in the home. Taxpayers who qualify to claim a reduced maximum exclusion under this notice and have filed their returns for taxable year 2001 may file amended returns to claim the exclusion.

The Treasury and IRS plan to issue permanent regulations to spell out "unforeseen events" in the near future. The regulations will consider the death of the taxpayer's spouse, man-made disasters, and acts of war, and will give the IRS Commissioner the discretion to deem other circumstances as unforeseen events.

"This guidance provides clarification, and reassurance, that those affected by the September 11th terrorist attacks are entitled to exclude the gain from the sale of their principle residence," said Pam Olson, the Treasury's acting Assistant Secretary for Tax Policy.

For other tax relief provisions related to terrorism visit the IRS's "Relief Related to Terrorist Actions" Web page, and check with local and state tax jurisdiction offices.

Published: August 30, 2002

Use of this article without permission is a violation of federal copyright laws.

A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.