As noted in yesterday's tip, profit from the sale of a home is almost always tax-free. Up to $250,000 in profit can be excluded from taxable income if you are single, and up to a cool half a million gets a wink and a nod from the IRS if you're married an file a joint return.

The key for qualifying for this great break is that you own and live in the house for two of the five years leading up to the time of the sale.

But what if you fail that test? Does the government demand a share of your profit if you only owned your home for 23 months?

Not necessarily. Depending on why you moved, you still may be able to qualify for an exclusion that protects all of your profit. And the IRS has a lengthy list of "good reasons" that can earn you a partial exclusion.

Some people think a partial exclusion means that part of the profit would be tax free. But that's not necessarily so. It's possible that every dime of profit will be tax free. The partial exclusion doesn't mean part of the profit is protected. It means your profit is protected by part of the $250,000/$500,000 exclusion.

Say, for example, that you owned your home for just one year before selling it because you moved to take a new job. Because you owned and lived in the house for half of the two-year period, you get half of the exclusion. That means the first $125,000 of profit is tax-free if you're single and $250,000 if you're married and file a joint return. (If you made more profit than that in a year, congratulations!)

In the past, the only sales that qualified for a partial exclusion were those connected with a move to take a new job or a move connected with a change in your health. But the IRS has issued a list of "unforeseen circumstances" that also can lead to a qualifying sale. They include:

• death,


• divorce or legal separation,


• becoming eligible for unemployment compensation,


• a change in employment that leaves the taxpayer unable to pay the mortgage or reasonable basic living expenses,


• multiple births resulting from the same pregnancy,


• damage to the residence resulting from a natural or man-made disaster, or an act of war or terrorism, and


• condemnation, seizure or other involuntary conversion of the property.

And the tax agency continued to show its willingness to work with taxpayers on this issue with a couple of generous private letter rulings in 2005. In one, for example, a reduced exclusion is allowed for taxpayers in a seniors-only community who had to sell their home after circumstances forced their child and grandchild to live with them. In another, a couple who didn't realize their new home was in a high-crime area got a partial exclusion when they sold after being assaulted.

You'll find a worksheet in IRS Publication 523 to help figure the exact size of your exclusion based on how long you owned and lived in the house.. If all your profit is tax-free, you don't have to report the sale to the IRS at all.

MORE: Kiplinger.com | Your Money | Taxes | Column

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