Planning opportunities with the Sec. 121 partial exclusion

On May 6, 1997, Congress ended the once-in-a-lifetime, over-age-55 exclusion for the sale of a primary personal residence. It is unclear whether the purpose of Sec 121's change was to recognize the more mobile lifestyle that the society had developed since the old Sec 121 was passed in 1964 or to provide a tax break for homeowners who were experiencing significant appreciation in their primary residence. In order to explore the planning opportunities available under the partial exclusion rule, it is first necessary to appreciate the basic rules of Sec. 121 and how to compute the partial exclusion exemption. The article then addresses the three justifications for applying the partial exclusion rule, including a discussion of each basic justification and the safe harbor for each. The article concludes with observations about the current IRS examples and how they appear to be more flexible than what the partial exclusion regulations seem to state.