Recently, I had a client who was offered a job transfer to Connecticut. I had sold him a home in Port Hueneme one year ago, so he was concerned about the fact that he might have to pay capital gains taxes when he sold this year.  I advised him to check with his tax accountant to see if he was eligible for an exclusion.  As it turns out, he was! 

 According to the IRS changes in 1997-1998:  You can claim a portion of the maximum exclusion if you sell early because of a change in employment, a change in health, or because of "unforeseen circumstances."  For example, a single homeowner who sold his property for a profit after just one year because of a corporate transfer could claim one half of the full $250,000 standard exclusion-$125,000.

 In the absence of formal regulatory guidance from the IRS interpreting employment change, health change and "unforeseen circumstances", many taxpayers have been reluctant to use the partial exclusion.  The IRS itself warned taxpayers not to claim "unforeseen circumstances" on their returns until the agency itself spelled out precisely what circumstances qualify.

 Now the IRS has done so with interim rules, opening the door to partial exclusion claims.

 On "unforeseen circumstances" the IRS lists seven major categories that create a "safe harbor" that automatically makes the claim eligible:

• Death of the taxpayer, a spouse, a co-owner or any member of the taxpayer's household.
• Divorce or legal separation.
• A job loss that results in eligibility for unemployment compensation.
• A change in employment that leaves the taxpayer unable to pay the mortgage or basic living expenses.
• Multiple births from the same pregnancy.
• Damage to the residence resulting from a natural or man-made disaster, or an act of war or terrorism.
• Condemnation, seizure or other involuntary conversion of the property.

 The regulations also give the IRS commissioner the discretion to determine other circumstances that qualify as unforeseen.

 On employment changes that trigger early sales, the IRS rule is straightforward:  "A home sale will be considered related to a change in employment if a qualified person's new place of work is at least 50 miles farther from the old home than the old workplace was from that house. " This is the same distance rule that applies for the moving expense deduction.  The employment change must occur during the taxpayer's ownership and use of the home as a residence.

 The new rules allow a partial exclusion or health if "the primary reason is related to a disease, illness or injury" of the home seller or member of the household.  If a physician recommends a change in residence for health reasons, that will be sufficient to claim the exclusion.

Reprinted from Southland Title, by Kenneth R. Harney, permission of Realty Times, Copyright 2002.