Capital Gains Tax

[user17577323767]

If someone bought a house in May of 2020 and left to go to their parents home in a different state in December of 2022 due to health issues and sold their house in July of 2026 but the intent since 2022 was always to return, never moved our belongings, and still considered it their primary address even though they weren’t there. Would they still get the capital gains tax exclusion for the 250,000 ?

[guywong]

I don't think there is a definitive answer to your question.  It's all based on facts and circumstances.  You may want to read the Webert, T.C. Memo. 2022-32.  The link below is an article from Tax Adviser on that case.

Dispute remains over whether couple sold house due to poor health

If you want to claim the Section 121 $250,000 exclusion, I suggest you disclose your fact and circumstance on a disclosure form 8275 documenting your reasoning that you believe you qualify.  Why a July 2026 sale date? If you want a definitive answer, get a Letter Ruling from the IRS.

Code revenue procedures regulations letter rulings | Internal Revenue Service

[Hal_Al]

Q. Would they still get the capital gains tax exclusion?

A. Probably, but not the full $250,000 maximum. 

You  apparently know about the rule that usually you must live in the home 2 out of the 5 years prior to the sale, to qualify for the exclusion.  There is a reduced maximum exclusion, for those who don't meet the 2 year rule due to "unforeseen circumstances".   In your case (you lived in the home 17 months during the 5 year period), you maximum exclusion would be 17/24 x $250,000 = $177,000 +/-.  Health reasons usually qualify as "unforeseen circumstances". But, as others have said, the IRS will look at the details of your situation. 

References:

http://www.nolo.com/legal-encyclopedia/the-partial-home-sale-tax-exclusion-irs-approved-unforeseen-c...

https://www.irs.gov/publications/p523#en_US_2022_publink100073099

 https://www.journalofaccountancy.com/issues/2009/nov/20091783.html

https://www.law.cornell.edu/uscode/text/26/121

http://www.nolo.com/legal-encyclopedia/qualifying-the-home-sale-exclusion-without-living-in-the-home...