Capital Gains Tax with Partial Exclusion with Health exemption

[taxman535]

 Hello, I bought my grandparents farm for 440,000, June 2023. Every time we tried to move in we got sick and had to move out. We spent about 110,000 fixing it up and trying to fix what we thought was causing our symptoms. We could not figure it out and gave up selling it for 665,000 November, 2024. We only spent about a total of 8 nights there due to our symptoms.

I heard you can get a partial exclusion for medical reasons for selling the home. AKA, I would not owe the usual capital gains due to not living in it for 2 years before selling it.

However, it looks like that is only the amount of time actually occupied in it would be counted in Turbo Tax so only 8 days.

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However however, I read some additional knowledge:

The IRS doesn’t calculate the exclusion based solely on days physically lived in the home. Instead, they look at the time owned and the unforeseen reason that prevented meeting the two-year residency requirement. For a partial exclusion, you calculate based on the portion of time owned and used as your residence within the two-year period. However, the "use as your residence" can include situations where you intended to live there but were prevented due to medical reasons.

So, the calculation I provided earlier (18 months / 24 months = 75%) is more aligned with IRS guidance for unforeseen circumstances. The 8 days of occupancy alone shouldn't determine your exclusion, as your intention to live there, health issues, and ownership period all factor into the eligibility for the partial exclusion.

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is this possible to account for in Turbo Tax? Or do I need to hire a professional

[Mike9241]

what i found is that the partial exclusion is based on the smaller of the time period the homeowner meets the ownership and use requirements.

When a taxpayer alternates between two (or more) homes, the home that is used the majority of the time during the year will ordinarily be considered the principal residence which is the only the only home that qualifies for gain exclusion. REG 1.121-1(b). There are other factors that can be used in determining a taxpayer's principal residence include:

• the taxpayer's place of employment
• The principal place of abode of the taxpayer's family members
• The address listed on the taxpayer's federal and state tax returns, driver's license, auto registration, and voter registration
• The taxpayer's mailing address for bills and correspondence
• The location of the taxpayer's banks
•  The location of religious organization and recreational clubs which the taxpayer utilizes

no one factor is determinative. 

this is from iRS PUB 523 home sale

Health-Related Move
You meet the requirements for a partial exclusion if any of
the following health-related events occurred during your
time of ownership and residence in the home.
• You moved to obtain, provide, or facilitate diagnosis,
cure, mitigation, or treatment of disease, illness, or in
jury for yourself or a family member.

this seems to contradict what you say you found

The IRS doesn’t calculate the exclusion based solely on days physically lived in the home. Instead, they look at the time owned and the unforeseen reason that prevented meeting the two-year residency requirement. For a partial exclusion, you calculate based on the portion of time owned and used as your residence within the two-year period. However, the "use as your residence" can include situations where you intended to live there but were prevented due to medical reasons.

see if others comment and it may be best to consult a pro.

[taxman535]

Thank you for the detailed feedback and references. I agree that the exclusion is based on the smaller of the ownership and use periods, but my understanding from IRS Publication 523 is that health-related moves qualify for a partial exclusion even if the full use requirement isn’t met. In my case, severe health issues linked to environmental conditions in the home made it unsafe to live there, which seems to align with the criteria for a health-related exception.

Regarding the principal residence factors, since this was my only home during the relevant period and was intended as my primary residence (e.g., for taxes and utilities), wouldn’t that satisfy the principal residence requirement despite minimal physical presence?

I appreciate your suggestion to consult a tax professional, and I plan to do so to ensure my filing is accurate. If you have additional guidance or interpretations, I’d be grateful for them. Thanks again!