If we are forced to sell our house because we've changed jobs or faced uncertain circumstances, a portion of our gain is exempt from taxes. Can you please clarify?

I am planning on selling my house due to the current economic downturn. My husband and I have lived in the house for 19 months. If we are forced to sell because we've changed jobs or faced uncertain circumstances, a portion of our gain is exempt from taxes. Can you please clarify?

This gives us an opportunity to explain the house sale rules a bit. Essentially, the gain on a home is excluded from income up to $250,000 for singles and $500,000 for couples. That is gain. So, if you sell your home for $1 million and bought it for $750,000, you'd be able to exclude that $250,000 gain from income.

There are restrictions here. The home must have been your principal residence for an aggregate of at least 2 years in a 5-year period ending on the date of the sale.

But, as Angela says, you can exclude a portion of the sale if you are forced to sell the residence because of a change in your place of employment or health or unforeseen circumstances. In this case, you can exclude a percentage determined by dividing the number of months you lived in the residence by 24. So if you lived there for 9 months and then had to move, you can exclude 9/24ths of the gain.

So what are unforeseen circumstances? Well, the IRS has not yet issued guidance on this vague term. But here is my rule of thumb: If you think you are making it up to fit, then it is probably not going to fly with the IRS.