Advice on Partial Exclusion Capital Gains Tax

Key Points to Understand in Your Case

  1. Partial Exclusion for Medical Reasons:

    • The sale of a home may qualify for a partial exclusion if:
      • A doctor recommends moving because the house is detrimental to your health.
      • You or a family member experiences health issues that necessitate selling the home.

  2. Calculation of the Exclusion:

    • The exclusion is prorated based on the time you owned and used the home as your principal residence, relative to the full 2-year requirement.
    • The use requirement does not need to be continuous; even brief periods of occupancy count. However, your use of the home as a principal residence is what matters—not merely owning it.

  3. Your Situation:

    • You owned the home for 17 months (June 2023–November 2024).
    • You only lived there for about 8 nights but intended it to be your principal residence.
    • If your medical condition required you to leave, and a doctor can confirm this, you likely qualify for a prorated exclusion.

How to Calculate the Partial Exclusion

The IRS exclusion for capital gains on a principal residence is:

To prorate:

  1. Divide the time you owned and used the home as a principal residence by 2 years (24 months). In your case: 17/24≈0.7083.

  2. Multiply the prorated percentage by the full exclusion amount:

    • Single filer: 0.7083×250,000=177,083.
    • Married filing jointly: 0.7083×500,000=354,167.

This is the maximum amount of capital gains that can be excluded from taxation.

Your Taxable Gain

  1. Selling Price: $665,000.

  2. Adjusted Basis:

    • Purchase price: $440,000.
    • Improvements: $110,000.
    • Total basis: $550,000.

  3. Capital Gain: 665,000−550,000=115,000665,000 – 550,000 = 115,000665,000−550,000=115,000.

  4. Apply Partial Exclusion:

    • Single filer: Entire $115,000 gain is excluded (it’s below the $177,083 partial exclusion limit).
    • Married filing jointly: Entire gain is also excluded (it’s below the $354,167 limit).

Documentation Needed:

To qualify for the partial exclusion, you’ll need:

  1. Medical Records or Doctor’s Note: Documentation proving that the home caused health issues or exacerbated symptoms.

  2. Proof of Ownership and Use: Documents showing when you bought and sold the home, as well as your intention to make it your principal residence (e.g., utility bills, mail forwarding, etc.).

  3. Receipts for Improvements: To adjust your cost basis correctly.

Final Consideration

You don’t owe any capital gains tax on the sale if you meet the health-related exception and document your case properly. The “8 days” of physical occupancy is not a strict barrier, as the IRS evaluates intent and unforeseen circumstances, especially when health issues are involved.