You may qualify to exclude from your income all or part of any gain from the sale of your main home. This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Amount of Exclusion, next. To qualify, you must meet the ownership and use tests described later.

You can choose not to take the exclusion. In that case, you will have to pay tax on your entire gain.

You can use Worksheet 2 on page 11 to figure the amount of your exclusion and your taxable gain, if any.

Worksheet 1. Adjusted Basis of Home Sold and Worksheet 2. Gain (or Loss), Exclusion and Taxable Gain

Maximum Amount of Exclusion

You can exclude the entire gain on the sale of your main home up to:

1. $250,000, or
2. $500,000 if all of the following are true.
   1. You are married and file a joint return for the year.
   2. Either you or your spouse meets the ownership test.
   3. Both you and your spouse meet the use test.
   4. During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.

Reduced Maximum Exclusion

You can claim an exclusion, but the maximum amount of gain you can exclude will be reduced, if either of the following is true.

1. You did not meet the ownership and use tests for a home you sold due to:
   1. A change in health,
   2. A change in place of employment, or
   3. Unforeseen circumstances, to the extent provided in regulations (as discussed below).
2. Your exclusion would have been disallowed because of the rule described in More Than One Home Sold During 2-Year Period, next, except that you sold the home due to:
   1. A change in health,
   2. A change in place of employment, or
   3. Unforeseen circumstances, to the extent provided in regulations (as discussed below).

Use Worksheet 3 on page 13 to figure your reduced maximum exclusion.

Reduced Maximum Exclusion

Unforeseen circumstances. The IRS has not issued regulations defining unforeseen circumstances. You cannot claim an exclusion based on unforeseen circumstances until the IRS issues final regulations or other appropriate guidance.

More Than One Home Sold During 2-Year Period

You cannot exclude gain on the sale of your home if, during the 2-year period ending on the date of the sale, you sold another home at a gain and excluded all or part of that gain. If you cannot exclude the gain, you must include it in your income.

However, you can still claim an exclusion if you sold the home due to:

1. A change in health,
2. A change in place of employment, or
3. Unforeseen circumstances, to the extent provided in regulations (as discussed above).

The maximum amount you can exclude is reduced. See Reduced Maximum Exclusion, earlier.

Example 1. In September 1998, Paul and Nadine bought a new home. In November 1998, they sold their old home at a $40,000 gain. They had owned and lived in the old home for 4 years. They excluded the gain on the sale.

On October 1, 2000, Paul and Nadine sold the home they purchased in September 1998 at a $15,000 gain. The sale was not due to a change in health or place of employment. Because Paul and Nadine had excluded gain on the sale of another home within the 2-year period ending on October 1, 2000, they cannot exclude the gain on this sale.

Example 2. The facts are the same as in Example 1 except that Paul and Nadine did not sell the home purchased in September 1998 until December 1, 2000. Because they had not excluded gain on the sale of another home within the 2-year period ending on December 1, 2000, they can exclude the gain on this sale.

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