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'Special reasons' can lower capital gains taxes

Dear Tax Talk,

I have read through your comments on exclusions because of "special reasons," and my husband and I fall into that group. We are relocating because of employment and may realize a gain of $250,000. We have lived here 10 months, so logically we receive the benefit of 10/24ths. That said, is this exclusion impacted by a prior exclusion?

Specifically, in our case, my husband had a small exclusion on property gains using the standard two out of five years in 2003. Does this prior exclusion bear any impact on the "special reasons" partial exclusion? Thanks. -- Dawn



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Dear Dawn,
I'm glad that somebody makes good use of my archived columns. When you move from your home for special reasons, such as health or a job-related move, you can claim a portion of the overall capital gain exclusion that is available on the sale of your primary residence.

The exclusion that normally applies to the gain on the sale of your home after you live in it for two years is $250,000, or in the case of a married couple filing a joint return, $500,000. This amount is prorated if you move prior to two years as a result of special reasons. The prorated exclusion is based on the number of months you lived in the home divided by 24 months. In your case you'll get $208,333 in exclusion based on 10 months and a joint return. By the way, it's incredible that your home increased $250,000 in 10 months. Did you discover oil on your property?

Under the special-reason exclusion, the rule that limits the use of the gain exclusion to once every two years is waived. If you had sold the other home within the 10-month period, you would be limited to the number of months between the two sales. For example, had you sold the first home in December 2004 and the job-related move home in July 2005, your exclusion would be based on eight months (December through July, inclusive), not the 10 that you occupied the job-related-move home. If the other home was only your husband's, then you would get 10/24ths of $250,000, and he would get 8/24ths of $250,000. Worksheet No. 3 on page 15 in Publication 523 explains this limitation.

Bankrate.com's corrections policy
-- Posted: July 12, 2005
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