Deductions & credits

normally for a married couple to avoid tax on the gain on the sale of their primary residence one or both of them must own it for 2 out of 5 years and both must occupy it for 2 years out of the 5 year period ending on the date before the sale. Neither may have excluded the gain from the sale of another primary residence in this 2 year period. The excludable gain is a maximum of $500,000.  

if these tests are not met, there will be a partial exclusion if any of these safe harbor tests are met:

1) change in place of employment - the new place of employment is at least 50 miles farther from the residence sold than the former place of employment  was

2) health - to obtain, provide, or facilitate the diagnosis, cure, mitigation or treatment of disease, illness or injury of a qualifying individual who lives in the home. a qualifying individual is parent, grandparent, stepmother or father, child, grandchild, stepchild, adopted child, brother,  sister, step or half brothers or sisters, most in-laws, uncle, aunt, nephew, niece or cousin.

moving for general health or well-being reasons does not qualify

3) unforeseen circumstance  - this is a broad category but includes

a) an involuntary conversion of the home

b) natural or man-made disaster, act of war or terrorism resulting in a casualty to the home 

c) death, loss of job, change in employment (that does meet the mileage test) which results in taxpayer's inability to pay basic living expenses

d) divorce or legal separation

e) multiple births resulting from the same pregnancy 

f) another event which the IRS deems an unforeseen circumstance - many times a private letter ruling is sought to ensure the IRS agrees - for this consult a tax pro. 

the partial exclusion is computed