You’re probably familiar with the current version of the tax break known as the home
sale exclusion. If you’re single, you can exclude up to $250,000 of gain on the sale of
your home. The exclusion can be as much as $500,000 when you’re married filing
jointly. In either case, the general requirement is that you have owned and used the
home as your principal residence for at least two of the previous five years.
Typically, the exclusion is unavailable if you claimed it on your tax return within the
last two years.
What happens if you sell the home without meeting the two-of-five-year
requirement, or if you elected the exclusion within the last two years? In some
cases, you still may be eligible for a partial exclusion. To qualify for this modified tax
break, the home sale must have resulted from a change in employment, the need for
medical care, or other “unforeseen circumstances.”
What are unforeseen circumstances? Examples include death, divorce, loss of a
job or a substantial pay cut, multiple births from the same pregnancy, the taking of
property, and damage from a disaster.
What if none of the examples apply? You may not be able to claim any exclusion
– or the IRS may examine the facts and circumstances of your case, and grant a
partial exclusion. That could happen when factors beyond your control forced you to
sell the home before you could have reasonably anticipated that you would in the
normal course of events.
A partial exclusion is based on the time of use and ownership as a principal
residence. For example, if you lived in the home for one year, the maximum is
$125,000 when you’re single, and $250,000 when you’re married filing jointly.