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George Saenz, the Bankrate.com Tax Talk columnistIn-laws move to live near daughter

Dear Tax Talk,
When my in-laws retired due to age and health considerations, they moved to be close to us so my wife could help them. However, after one year my company relocated me to another city. As a result, they moved to stay close to us. When they sold their home (which they lived in for about 12 months), the price went up by about $25,000.

Are they responsible to pay a capital gains tax on this amount, since they didn't live there for two years? Do they meet the special circumstances that would exempt them? Other info: They used the proceeds to buy a new home; they are over 65 years of age. Please advise.
-- Rich

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Dear Rich,
A married couple can exclude up to $500,000 in gain from the sale of their principal residence if they have lived in and owned the home for two years within the last five years. The age at time of sale or the reinvestment of the sale proceeds does not matter in determining if they can exclude gain.

A lesser amount of gain (approximately $20,000 a month for every month lived in the home) can be excluded from income when the two-year minimum is not met but the reason the home was sold is:

a. a change in place of employment,
b. health, or
c. unforeseen circumstances

Although you would qualify under the change in employment exception, your in-laws would not fall into that exception category. A sale for health or unforeseen circumstances (whichever applies) is considered to be the reason they sold their home if either of the following is true:

  1. The sale qualifies under a "safe harbor." A safe harbor is a set of certain facts and circumstances that qualifies them to claim a reduced maximum exclusion.
  2. The primary reason they sold the home was health or unforeseen circumstances and the facts and circumstances surrounding the sale support this conclusion.

The sale of their home would be because of health if the primary reason for the sale was to obtain, provide or facilitate the diagnosis, cure, mitigation or treatment of disease, illness or injury of themselves. Health is considered to be the reason they sold their home if, for one or more of the reasons listed in the preceding sentence, a doctor recommends a change of residence. A doctor-recommended move is considered a safe harbor, and I hope they can use this to obtain their reduced exclusion.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.

Bankrate.com's corrections policy -- Posted: March 3, 2006
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