If you owned and lived in your Tucson Home for two years, the law is clear:

You can exclude from profit up to $250,000 if you are single or $500,000 if you are married and file a joint return.

But what if you have made a profit on your Tucson Home, and sell it before the magic two years spelled out in the tax law?

When Congress enacted this exclusion legislation, it had absolutely no idea that the real estate market would be so hot, or that so many homeowners would make profits on their home sales, even if they did not own their property for the full two years. However, Congress did provide reduced exclusions, if prior to holding the property for the full two years, the homeowner had to sell due to a change in employment, health reasons or “unforeseen circumstances”.

For over five years, taxpayers were in the dark as to what the IRS would consider as “unforeseen”. Finally, effective December 24, 2003, the IRS issued temporary regulations, dealing with home sales within the two year period. According to the IRS, they have established certain “safe harbors”. If the taxpayer falls within one of these safety zones, they will automatically be entitled to the appropriate exclusion of gain. Here are some of the new, but temporary, “safe harbors”:

Employment: If the new place of employment is at least 50 miles father from the residence sold than was the former place of employment, the homeowner who sells their home to be closer to work can take a 'proportionate' exclusion of gain. For example, if the homeowner owned the home for only one year, that homeowner would be entitled to exclude half of either the $250,000 or the $500,000 exclusion, depending on the marital and tax filing status of the taxpayer.

Health: if a doctor recommends a change of residence for reasons of health, this will be a safe harbor under the new temporary regulations. What determines “health”? According to the IRS, “if the taxpayer’s primary reason for the sale is (l) to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury... or (2) to obtain or provide medical or personal care for a qualified individual suffering from a disease, illness or injury.” It should be noted that “qualified individuals” includes family members who are in need of medical assistance away from the principal residence. The IRS made it clear, however, that a sale of the family home merely because it is beneficial to the general health or well-being of the taxpayer will not fall within the safe harbor.

Unforeseen Circumstances: The IRS has provided that the following events would be considered “safe harbors”, on the condition that these events involve the taxpayer, his/her spouse, co-owner or a member of the taxpayer’s household:

1. Death;
2. Termination from employment and thus eligiblity for unemployment compensation;
3. Change of job status that results in the taxpayer being unable to pay the mortgage and reasonable basic living expenses for the taxpayer’s household;
4. Divorce or legal separation;
5. Multiple births resulting from the same pregnancy;
6. Involuntary conversion of the property -- such as a condemnation by a governmental authority, and
7. Destruction of the property because of a man-made disaster, an act or war or terrorism.

These regulations can be applied retroactively. Even if you sold your Tucson Home after May 7, 1997 and have already filed a tax return for the year in which the sale took place, you have the right to file an amended tax return.
Taxpayers who believe that they are entitled to claim an exemption because they fall into one of these safe harbors should immediately consult their tax advisors.

As Always, Check with your own personal Tax Professional!
The rules are quite complicated and can change at any time.