Reduced Exclusion

You might qualify for a partial exclusion of gain on the sale of your home even if you don't meet the two-year rules, if the reason that you can't meet them is because you suffered a "change in place of employment, health, or unforeseen circumstances."

Exactly what type of "change" is serious enough to warrant this tax break has not yet been defined in the regulations or any official pronouncements by the IRS. If you think this exception might apply to you, for the time being, we advise you to think about what a "reasonable" person would think was justification for moving. For example, taking a job in another city; moving to a warmer, drier part of the country due to severe asthma; or selling your home because of a drop in income would probably warrant a partial exclusion.

Planning Tools You can compute a partial exclusion by using this reduced exclusion worksheet. At this time, though, it is unclear whether the reduced exclusion will apply when a home acquired in a like-kind exchange does not meet the five-year ownership period due to one of the special circumstances.