If you fail to meet the two-out-of-five year ownership and use tests, you can qualify for a partial exclusion (related to the period of time you were in the home) if you can show that the move was because of an unforeseen circumstance. There have been a number of examples given by the IRS on what constitutes an unforeseen circumstance (e.g., divorce, unemployment, multiple births from a single pregnancy). If you have one of these or believe your situation is an unforeseen circumstance, you can claim the partial exclusion. Be prepared to defend your position if the IRS questions your return. These are the factors used by the IRS to decide whether the sale is the result of an unforeseen circumstance:
To be absolutely sure, you can ask the IRS’s opinion about whether your situation qualifies by submitting a private letter ruling request. There’s a user fee for making this request.
Two or more persons who have undivided ownership rights in property. Upon death of a tenant, his or her share passes to his or her estate, rather than to the surviving tenants.