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If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. This applies to those who:
Fail to meet the ownership and use tests, or
Have used the exclusion within 2 years of selling their current home.
In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons.
A change in place of employment.
What is an unforseen circumstance? Does financial difficulty qualify?
What would a reduced exclusion amount to?
What is an unforeseen circumstance? Does financial difficulty qualify?
Specific event safe harbors. Unforeseen circumstances are considered to be the reason for selling your home if any of the following events occurred while you owned and used the property as your main home.
An involuntary conversion of your home, such as when your home is destroyed or condemned.
Natural or man-made disasters or acts of war or terrorism resulting in a casualty to your home, whether or not your loss is deductible.
In the case of qualified individuals :
Unemployment (if the individual is eligible for unemployment compensation),
A change in employment or self-employment status that results in the individual's inability to pay reasonable basic living expenses for his or her household,
Divorce or legal separation under a decree of divorce or separate maintenance, or
Multiple births resulting from the same pregnancy.
An event the IRS determined to be an unforeseen circumstance in published guidance of general applicability. For example, the IRS determined the September 11, 2001, terrorist attacks to be an unforeseen circumstance.
The full exclusion is $250,000 (or $500,000 for married couples filing jointly).
If you qualify for a reduced exclusion - the amount of exclusion is determined as 6month (you owned and lived in the house) / 24 month (to qualify for the full exclusion) * $500,000 (maximum exclusion for the married couple) = $125,000.
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