You can exclude from gross income up to $250,000 ($500,000 joint) of gain from the sale of your principal residence. This exclusion can be claimed once every two years. An exception is provided if you do not meet the ownership and use tests, or the limit of one sale in two years as a result of a change in place of employment, health, or unforeseen circumstances. IRC Sec. 121(c). Unforeseen circumstances include: involuntary conversion (e.g., fire), death, or divorce. Reg. Sec. 1.121-3(e), and other situations deemed appropriate.
The following factors will be considered in determining if another circumstance qualifies:
The sale and the circumstances giving rise to it are close in time;
The suitability of the house as your principal residence materially changes;
Your financial ability to maintain the property is materially impaired;
The circumstances giving rise to the sale were not reasonably foreseeable when you began using the property as your principal residence; and
The circumstances giving rise to the sale occur during the period you in fact own and use the property as your residence. Reg. 1.121-3(b)
In a recent ruling, the IRS held that the commission of a violent crime against a homeowner at his home justified a sale and waived the requirements. PLR 200630004. A reduced exclusion applies to gain from the sale of the home.
The $250,000/$500,000 maximum exclusion is multiplied by the shortest of the following:
The period you owned the property during the 5-year period ending on the date of sale;
The period you used the property as your principal residence during the 5-year period ending on the date of sale; or
The period between the date of the prior sale or exchange of property for which you excluded gain under Code Section 121 and the date of the current sale] divided by 730 days.
Take all of the following into consideration when determining how much you can exclude from your gross income.
Our Consumer Webcasts and Blogs
Subscribe to our email list to receive information on consumer webcasts and blogs, for practical legal information in simple English, delivered to your inbox. For more professional driven information, please visit Shenkman Law to subscribe.