Capital Gains on Home Sale

[user17525168329]

I bought a NYC coop 11 years ago as my primary residence, in Oct. 2020 I was laid off due to the pandemic, I then moved in Sept 2021 to upstate NY and moved in with family. I am now selling my coop and should close by Sept. 2025. May I take a $125K exemption based on living in the property for one year out of five since I was on unemployment and moved for a lower cost of living?  Do I need any proof beyond the unemployment records?

[user17525168329]

I was on unemployment for about 5 months in 2021.

[SusanR2]

In short, maybe.

At the outset, I just want to note that a coop or cooperative apartment qualifies for the capital gain exclusion if it is your main home and you are elligible to claim it.   Getting to your question, generally, you need to have lived in the home 2 out of the 5 years prior to selling to get the full capital gain exclusion for your filing status (ie $250,000 for Single and $500,000 for Married Filing Joint).   

There are exceptions which may enable you to take a partial exclusion.  Unemployment in and of itself is not one of those exceptions.  But moving for employment and unforeseen change in circumstances can qualify (becoming elligible for unemployment is an unforeseen circumstance IRS lists as an example) .  Exception situations can be fact specific (in general you need to be living in the home when they occur and the sale typically needs to take place shortly after the circumstances arise).  I do not know all of the details of your situation so I cannot state with certainty you'd qualify.  I  can only suggest that you make sure you have very good records to back up your position that you qualify for an exception if you claim one on your return -  in case you are questioned or audited on that issue down the road.  

Please take some time and review the following for more detailed information that you can apply to your specific situation (one is a TurboTax article and the other is the IRS Publication dealing with this issue):

Tax Aspects of Home Ownership: Selling a Home 

IRS Publication 523

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Edited 7/16/25 3:17pm PST

[liberTE]

Yes, you can, the service exclusion. Pls see this IRS Publication 523. https://www.irs.gov/publications/p523 

Does Your Home Sale Qualify for the Exclusion of Gain?

The tax code recognizes the importance of home ownership by allowing you to exclude gain when you sell your main home. To qualify for the maximum exclusion of gain ($250,000 or $500,000 if married filing jointly), you must meet the Eligibility Test, explained later. To qualify for a partial exclusion of gain, meaning an exclusion of gain less than the full amount, you must meet one of the situations listed in Does Your Home Qualify for a Partial Exclusion of Gain, later.

[KusyJ]

IRS Publication 523 explains the eligibility requirements for exclusion for capital gains in a sale of a primary residence:

The ownership test requires ownership in at least 24 months of the previous 5 years. 

The residency test requires use of the home for at least 24 months in the previous 5 years. The 24 months does not have to be successive months of residence, rather it is aggregated.

The lookback requirement is met if you have not sold another home during the 2-year period before the date of sale.

The Code of Federal Regulations does provide exceptions to the residence requirements for "unforeseen circumstances”. 26 CFR § 1.121-3(b) provides guidance for the safe harbor considerations for partial exclusion.

Specifically, 26 CFR § 1.121-3(e)(2)(iii)(B) provides a safe harbor exclusion for “The cessation of employment as a result of which the qualified individual is eligible for unemployment compensation (as defined in section 85(b))” 26 CFR § 1.121-3(e)(2)(iii)(C) further explains a change in employment status that results in the inability to pay housing costs and reasonable basic living expenses as a specific event safe harbor. 

26 CFR § 1.121-3(e)(4)(g) Explains the computation of the partial exclusion. Basically, the reduction in exclusion is determined by the amount of time as a primary residence divided by 24 months. That fraction is multiplied by the relevant exclusion ($250,000 for MFS/$500,000 for MFJ filers) not exceeding the total capital gain received from the sale of home.