 '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
 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.
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