Learning Center
Sold Your Home Before Meeting the Gain Exclusion Requirements? You May Still Qualify for a Partial Exclusion
When selling a principal residence, taxpayers turn to Section 121 of the Internal Revenue Code to mitigate potential capital gains taxes. Under this provision, homeowners can exclude up to $250,000 of gain ($500,000 for qualifying joint filers) from the sale. To fully qualify, individuals must have owned and lived in the home as their primary residence for at least two out of the five years preceding the sale date. However, life sometimes unfolds in ways that prevent individuals from satisfying the full requirements for this lucrative exclusion. Thankfully, the IRS provides relief through partial exclusions for those who need to sell their home due to a change in the place of employment, health issues, or unforeseen circumstances before meeting the two out of the five years standard requirement. This article delves into understanding how these exceptions operate, offering insights into when taxpayers can still benefit from a Section 121 gain exclusion despite not meeting the standard criteria.
Change in Place of Employment - The most common reason for a partial exclusion is a job-related move that causes the taxpayer to sell their home before the 2-of-5 years tests were met. To meet the "safe harbor" for this category, your new place of work must be at least 50 miles farther from your home than your old workplace was. If you didn't have a previous workplace, your new one must be at least 50 miles from the home you are selling.
Who does this apply to? Crucially, this condition does not just apply to the taxpayer. You may qualify for the partial exclusion if the change in employment affects:
The taxpayer.
The taxpayer’s spouse.
A co-owner of the home.
Anyone else for whom the home was their primary residence.
Health-Related Moves - A move is considered health-related if the primary reason is to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of a disease, illness, or injury. It also covers moving to provide medical or personal care for a family member. Note that a move for "general health and well-being" (e.g., moving to a warmer climate just because you like it) does not qualify; a doctor must generally recommend the change in residence.
Who does this apply to? The health condition is broad. It applies if the health issue affects a "qualified individual," which includes:
The taxpayer, spouse, or co-owner.
Family members, specifically parents, grandparents, stepparents, children (including adopted, foster, or stepchildren), grandchildren, siblings, in-laws, aunts, uncles, nephews, and nieces.
Any resident of the home.
Unforeseen Circumstances - An "unforeseen circumstance" is an event you could not have reasonably anticipated before purchasing and occupying the home. If your situation does not fit a specific safe harbor, the IRS looks at factors like whether the event and sale were close in time, or if your financial ability to maintain the home was materially impaired. But merely deciding after you’ve lived in a home for a while that you don’t like the neighborhood won’t qualify as an unforeseen circumstance.
The Safe Harbor List - The IRS provides a specific list of events that automatically qualify as unforeseen circumstances:
Involuntary conversion (e.g., the home is destroyed or condemned).
Natural or man-made disasters or acts of terrorism resulting in a casualty loss.
Death of a qualified individual (taxpayer, spouse, co-owner, or resident).
Divorce or legal separation.
Eligibility for unemployment compensation.
Change in employment status that leaves the taxpayer unable to pay basic living expenses (food, housing, taxes, etc.).
Multiple births from the same pregnancy.
How the Partial Exclusion is Calculated - The partial exclusion is not a flat rate; it is a fraction of the maximum exclusion ($250,000 or $500,000).
The Formula - You take the shortest of the following periods (in days or months) and divide it by 730 days (or 24 months):
1. The time you owned the home during the 5-year period before the sale.
2. The time you used the home as your primary residence during that same period.
3. The time since you last claimed the Section 121 exclusion for another home.
Example: If you are a single filer who lived in your home for 12 months before moving for a new job 100 miles away, and had last claimed the exclusion 6 years ago, you have met 50% of the 24-month requirement. You can exclude $125,000 (50% of $250,000) of your gain from taxes.
Navigating IRS Section 121 can be complex, especially when determining if your specific "facts and circumstances" meet the threshold for an unforeseen event. If you are planning a move or have recently sold a home before reaching the two-year mark, please contact this office for assistance in calculating your exclusion and ensuring your documentation meets IRS standards.
NEVER MISS A STORY.
Sign up for our newsletters and get our articles delivered right to your inbox.
Rose Tax & Financial
Cedar Crest, New Mexico 87008
Sat: 10:00am to 2:00pm
Check the background of your financial professional on FINRA's BrokerCheck
Avantax affiliated Financial Professionals may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state. Securities offered through Avantax Investment Services℠, Member FINRA, SIPC, Investment Advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. 972-870-6000.
The Avantax family of companies exclusively provide financial products and services through its financial representatives. Although Avantax Wealth Management® does not provide or supervise tax or accounting services, Avantax representatives may offer these services through their independent outside business. Content, links, and some material within this website may have been created by a third party for use by an Avantax affiliated representative. This content is for educational and informational purposes only and does not represent the views and opinions of Avantax Wealth Management® or its subsidiaries. Avantax Wealth Management® is not responsible for and does not control, adopt, or endorse any content contained on any third party website.
This information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences.
For Important Information and Form CRS please visit https://www.avantax.com/disclosures.