Eligibility for prorated captial gain exemption

[kg88]

We purchased our townhome in Dec 2015 and moved out in Sept 2020. Home has been on rent since then. Now we want to sell the townhome. We have stayed in the townhome for 1.5 years in last 5 years.

We moved out because of COVID. It is a small townhome, and it was hard to manage remote work with 2 kids (3 and 4 years old) in that small living space. Can we claim prorated capital gain exemption if we sell the house now?

[AmeliesUncle]

The I read things, no, you don't qualify for the reduced maximum exclusion.

Although your circumstance almost certainly would fall under the "Unforeseen Circumstances" qualification, the way I read things it does NOT fall under the "Safe Harbor".

If had fallen under a "Safe Harbor", you would have qualified.   But because it does not fall under a "Safe Harbor", then the fact it wasn't sold for 3.5 years will disqualify it (the 'reason' and the sale are not "proximate in time").

It is possible that other people could have different opinions, that that is how I read the Regulation.

[kg88]

Thanks for quick response.

Agreed that "Unforeseen Circumstances" is the only way out for us provided proximation clause let us use it.

Waiting to hear from other experts. Thanks in advance!

[Mike9241]

I agree with @AmeliesUncle 

this is from IRS reg 1.121-3(b)

(1) The sale or exchange and the circumstances giving rise to the sale or exchange are proximate in time;