Partial Exclusion of Capital Gain?

[YokoToshi]

I am trying to find out how it works to get a partial exemption of capital gains from the sale of a primary residence. I lived in the house 1.5 years. The reason for the move was medical but related to mental health. How do I go about getting the actual exemption (i.e. the mechanics -- do I have to send in medical records)? 

[MonikaK1]

There are specific circumstances in which you can claim a hardship exclusion to the 2 out of 5-year residency rule, in order to receive a partial exclusion of gain, including the timing of the hardship. Consider carefully whether you have met the requirements before excluding the gain on your return, and be prepared to present your case in the event of an IRS audit.

Please see IRS Publication 523 for a detailed explanation of the requirements. Here are some relevant excerpts:

If you become physically or mentally unable to care for yourself, and you use the residence as your principal residence for 12 months in the 5 years preceding the sale or exchange, any time you spent living in a care facility (such as a nursing home) counts toward your 2-year residence requirement, so long as the facility has a license from a state or other political entity to care for people with your condition.

If you don't meet the two out of five-year Eligibility Test, you may still qualify for a partial exclusion of gain (see the section "Does Your Home Qualify for a Partial Exclusion of Gain?" in Publication 523). You can meet the requirements for a partial exclusion if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event.

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 injury for yourself or a family member.
• You moved to obtain or provide medical or personal care for a family member suffering from a disease, illness, or injury. A family member includes your:
• Parent, grandparent, stepmother, stepfather;
• Child (including adopted child, eligible foster child, and stepchild), grandchild;
• Brother, sister, stepbrother, stepsister, half brother, half sister;
• Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law;
• Uncle, aunt, nephew, or niece.
• A doctor recommended a change in residence for you because you were experiencing a health problem.

The above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.

See also this TurboTax article on selling a residence. When entering the information in TurboTax, watch for the screen "Reason for Sale" and choose "change of health" if that is the reason.

[YokoToshi]

"You moved to obtain, provide, or facilitate diagnosis, cure, mitigation, or treatment of disease, illness, or injury for yourself or a family member."

Yes, but what documentation do I need and how do I submit proof for that? 

[ShirlynW]

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 injury for yourself or a family member.

A doctor recommended a change in residence for you because you were experiencing a health problem.