Learn how you might still qualify for the $250,000/$500,000 capital gains tax exclusion for homeowners even if you don't meet all the requirements.
By Stephen Fishman, J.D. · USC Gould School of Law
Updated by Amy Loftsgordon, Attorney · University of Denver Sturm College of Law
When you sell your home, you qualify for a considerable tax break. If you meet the requirements for the home sale tax exclusion, you don't have to pay any income tax on up to $250,000 of the gain from the sale of your principal home if you're single, or up to $500,000 if you're married and file a joint return.
How to Qualify for the $250,000/$500,000 Capital Gains Tax Exclusion for Homeowners
To qualify for the $250,000/$500,000 home sale exclusion, you must own and occupy the home as your principal residence for at least two of the five years before you sell it. If you meet all the criteria, you can take this exclusion an unlimited number of times. But you can't use it more than once every two years.
Are There Any Exceptions to the Two-Year Rule?
What if you have to sell your home even though you don't comply with all the requirements for the exclusion? This might happen, for example, if you sell before you have lived in the home for two years or if you have already used the exclusion for another home less than two years prior to this sale.
You might still qualify for a partial exclusion if you have a good excuse for selling the property.
What Are Some Good Reasons That Qualify for an Exception?
Good excuses include:
- a change in your place of employment
- health problems that require you to move, or
- circ*mstances you didn't foresee when you bought the home that force you to sell it.
Moving for Work
A change in the place of employment for you, your spouse, any co-owner of the property, or any other person who uses your home as their principal residence is always a valid excuse if the location of the new job is at least 50 miles further away from your old home. For example, say your old work location was 20 miles from your home, and your new work location is 80 miles from your home. In this case, you should qualify for an exception.
Moves of less than 50 miles could also qualify, depending on the circ*mstances. You can also qualify if you had no previous work location and began a new job at least 50 miles from your home.
Moving for Health Reasons
Health problems are a valid excuse if a doctor recommends that you move. For example, say you have asthma, and your doctor tells you that living in Arizona would be better for your health than Maine. The health problems can belong to you, your spouse, any co-owner of the property, any other person who uses your home as their principal residence, or a close family member of any person in the prior categories.
You're also eligible if you moved to obtain or provide medical or personal care for a family member suffering from a disease, illness, or injury. A "family member" includes your:
- parent, grandparent, stepmother, stepfather
- child (including adopted child, eligible foster child, and stepchild), grandchild
- brother, sister, stepbrother, stepsister, half-brother, half-sister
- mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law, or
- uncle, aunt, nephew, or niece.
So, for example, you can move if you need to be closer to an ill parent. You'll also qualify if you moved to get, provide, or facilitate diagnosis, cure, mitigation, or treatment of disease, illness, or injury for yourself or a family member.
Moving Because of Unforeseeable Events
You can also qualify for a partial exclusion if you have to sell your home because of unforeseeable events, such as if any of the following things happened when you owned and lived in the home you sold.
- Your home was condemned or destroyed or suffered a casualty loss because of a natural or other disaster or an act of terrorism.
- You, your spouse, a co-owner of the home, or anyone else for whom the home was their residence died, got divorced or legally separated (or were issued a separate decree to pay support to the other spouse), gave birth to two or more children from the same pregnancy, became eligible for unemployment compensation, or were unable to pay basic living expenses for the household due to a change in employment status.
- The IRS published guidance determining that a particular event is unforeseeable.
In addition, even if your circ*mstances don't fall under any of these examples, you might still qualify for an exception if you can show the primary reason for selling your home is work-related, health-related, or unforeseeable.
How to Qualify for an Exception to the Two-Year Rule
To qualify for the exception, you'll also have to show that:
- The situation that caused you to sell the home happened while you owned and used it as your residence.
- You sold your home shortly after the situation happened.
- You couldn't have reasonably foreseen the situation when you bought the home.
- You had significant financial difficulties maintaining the home, and it became significantly unsuitable as a primary home for you and your family for a particular reason.
How Much of an Exclusion Can I Get If I Qualify?
If you have a valid excuse for not complying with all the requirements for the exclusion, you'll get a partial exclusion—not the whole $250,000/$500,000. The amount is ordinarily limited to the percentage of the two years that you fulfilled the requirements.
For example, if you own and occupy a home for one year (50% of two years) and have not excluded gain on another home within two years and otherwise qualify, you may exclude 50% of the regular maximum amount—up to $125,000 of gain for a single taxpayer and $250,000 for married couples. The percentage may be figured by using days or months.
Get More Information on the Capital Gains Exclusion for Homeowners
For more information on the home sale exclusion, refer to IRS Publication 523, Selling Your Home and IRS Topic no. 701, Sale of your home.
IRS Topic no. 409, Capital Gains and losses covers general capital gain and loss information.
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Talk to a Tax Pro
Hiring the right tax professional is important because getting good tax help can translate into more money in your pocket. To get clarification about your eligibility for the home sale tax exclusion and learn more about tax deductions and other exclusions, talk to a tax lawyer or other tax adviser.
