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It has long been understood that if an owner of residential real estate sells the property too soon, they will miss out on the tax exemption offered by the IRS. But there are exceptions to the rule and the IRS has spelled them out very clearly. These exceptions deal with the $500,000 and $250,000 tax-free exclusion provisions of 1997 and 1998. If the owner sells the home before they are able to meet the 2-year minimum holding standard, it must be for one of the following three reasons:
1) Reasons of health. An incapacitating illness might qualify for half of the standard $250,000 maximum.
2) Employment change. For example, a couple purchased a house and had to sell it after just 18 months because of an unexpected cross-country employment transfer. These particular individuals might be able to file an exemption.
3) Unforeseen circumstances. The IRS is taking a no-nonsense approach to this final category. As an example, homeowners cannot claim they experienced an unforeseen overwhelming desire to own a different house in a different neighborhood. Likewise, they cannot say they are entitled to the exemption as a result of the unforeseen circumstance of winning the lottery.
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