7852 / If the maximum exclusion for gain on the sale of a principal residence is reduced because of a change in the taxpayer’s place of employment, health, or unforeseen circumstances, how is the reduced maximum exclusion calculated?
The reduced maximum exclusion is computed by multiplying the maximum dollar limitation of $250,000 ($500,000 for certain joint filers) by a fraction.
The numerator of the fraction is the shortest of: (1) the period that the taxpayer owned the property during the five-year period ending on the date of the sale or exchange; (2) the period that the taxpayer used the property as a principal residence during the five-year period ending on the date of the sale or exchange; or (3) the period between the date of a prior sale of property for which the taxpayer excluded gain under IRC Section 121 and the date of the current sale or exchange. The numerator of the fraction may be expressed in days or months.
The denominator of the fraction is 730 days or 24 months (depending on the measure of time used in the numerator).1 Thus, for example, a single taxpayer who would otherwise be permitted to exclude $250,000 of gain, but who has owned and used the principal residence for only one year and is selling it due to a job transfer, the fraction would be ½ and the maximum excludable amount would be $125,000 [½ × $250,000].2