Do my husband and I qualify for an exemption from capital gains taxes if he is losing his job and we are selling our home to decrease our expenses?

by Debra L. Hamel, CPA | Jun 07, 2018

I've lived in my home for the past year. My husband is losing his job in July, and we would like to sell to decrease our expenses. I know that in order to be exempt from capital gains taxes we need to have lived in the home for two of the last five years. I'm wondering if there are exceptions that would allow me to prorate the capital gains taxes? 

Based on the information provided, you may qualify for a partial exclusion of the capital gain that would be calculated from the sale of your personal residence.
Ordinarily, you and your husband must have lived in the home for two of the past five years, using it as your main residences. There are a few exceptions that allow for a partial exclusion of capital gain, one of which could apply in your particular case. To exclude a portion of the capital gain, you must either (a) demonstrate that you became eligible for unemployment compensation, or (b) that, because of a change in your husband’s employment status, you both were unable to continue to pay the basic living expenses for the household. The IRS defines these basic living expenses as those for “food, clothing, housing, medication, transportation, taxes, court-ordered payments, and expenses reasonably necessary for making an income.”
You should also be advised that the IRS considers the condition described in (b) as an “unforeseeable event” as determined by them. In other words, the IRS could agree with the financial hardship claim or take exception to it. Whether or not your husband qualifies for unemployment compensation is a matter of fact.

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Answered by: Debra L. Hamel, CPA, is a sole practitioner in Pittsburgh, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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