Reduced gain exclusion allowed on home sale in less than 24 months

This page last updated on
December 13, 2004

Selling Your Home?
The IRS Has Clarified Rule for Excluding Some of the Gain under Section 121

In 1997, the rules for taxing the gain on the sale of your home drastically changed under Internal Revenue Code Section 121. Simply put, if you owned and occupied your home for at least two years during the five-year period before the sale, you can exclude up to $250,000 of the gain, $500,000 if you file a joint return.

Taxpayers who did not meet the ownership and use tests are allowed a reduced Section 121 exclusion if certain unforeseen circumstances caused them to sell their home. Confusion surrounded the definition of "unforeseen circumstances."

The IRS has clarified situations that will meet the unforeseen circumstances exception. A sale will be considered as occurring primarily because of unforeseen circumstances if any of these events occur during the taxpayer's period of use and ownership of the residence:

	Death;
	Divorce or legal separation;
	Becoming eligible for unemployment compensation;
	A change in employment that leaves the taxpayer unable to pay the mortgage or reasonable basic living expenses;
	Multiple births resulting from the same pregnancy;
	Damage to the residence resulting from a natural or man-made disaster, or an act of war or terrorism; or
	Condemnation, seizure, or other involuntary conversion of the property.

Any of the first five situations listed above must involve you, your spouse, co-owner, or a member of your household to qualify.

The reduced exclusion under Section 121 allowed is based on the number of months the taxpayer owned and lived in the home compared the 24-month period necessary to qualify for the full exclusion. For example, if a married couple sold a home after only 12 months because one taxpayer was transferred by his/her employer, they would be entitled to half the full exclusion of $500,000.

IRC Section 121

[Home] [Site Map] [Contact Us]

Selling Your Home? The IRS Has Clarified Rule for Excluding Some of the Gain under Section 121

Selling Your Home?
The IRS Has Clarified Rule for Excluding Some of the Gain under Section 121