Tax options when selling and moving

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Dear Tax Talk,
My domestic partner and I rented a house under a lease purchase arrangement that took one year to close due to the owners’ financial difficulties. We lived in the house during this time. We then closed on the house and have lived here an additional nine months.

We have invested $45,000 in actual equity plus sweat equity in repairs and improvements, but still stand to make a considerable gain if we sell. My partner took a new job in a neighboring state and my company is relocating 20 miles from where I now work. Is there any relief available to us under the new capital gains tax rule if we sell our house?
— Sandy

Dear Sandy:
Generally, in order to claim the exclusion on the sale of your home you have to have owned it for at least two years. The lease option period does not count as a period of ownership. A partial exclusion, which is fairly generous, is allowed when you sell your home due to a change in place of employment.

The Internal Revenue Service has not issued regulations defining what is a home sale motivated by a change in place of employment. The only other part of tax law that relates to change of employment deductions is in the area of moving expenses. In order to claim moving expense deductions, you generally have to move at least 50 miles. But when Congress changed the law for home sales, they did not seem to tie this partial exclusion to the moving expense deduction distance test.

Based on what I can find you can change your place of employment and sell your home and still claim the partial exclusion without having to meet a distance test. Presumably, however, your primary motivation in selling the home has to be related to the change in place of employment.

The partial exclusion is $250,000 multiplied by the number of months you owned the home divided by 24 months. If at the time you sold the home, you owned it one year you can exclude up to $125,000 in gain and so can your partner, which is probably more than enough to avoid paying tax on the gain.