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.
