Help with 2-out-of-5-years rule for capital gains and partial exemption qualification

You're on the right track with your understanding of the partial exemption rules due to job relocation, but there are some important details to consider. The good news is that yes, you do qualify for a partial exemption based on your job-related move that was more than 50 miles away. The fact that you rented out the home after moving doesn't automatically disqualify you from claiming this exception. The IRS understands that sometimes people can't sell immediately. Your calculation method is correct. Since you lived in the home for 18 out of the 24 months required (75%), you can exclude 75% of the maximum exclusion amount. For married filing jointly, that's 75% of $500,000 = $375,000. With your expected profit of around $200,000, you would indeed fall below this threshold. However, there's a time element to be aware of. The IRS generally expects you to sell the home within a reasonable period after the qualifying event (job relocation). While there's no specific timeframe defined in the regulations, selling within 1-2 years of the move is typically considered reasonable. Since you've owned it as a rental for about a year, you should be fine, but the longer you wait, the more scrutiny you might face if audited.

I had a similar situation last year and discovered https://taxr.ai which helped me figure out my partial exemption calculation. I was super confused about whether my job-related move qualified since I didn't sell immediately either. Their system analyzed my documents and situation and showed exactly how the 2-out-of-5 rule applied in my case. The best part was I could upload my offer letters and previous tax returns, and it walked me through which parts qualified for the exemption. It confirmed I was eligible for a partial exclusion and showed exactly how much I could exclude based on my specific timeline.

I was initially skeptical about using online tax tools for my capital gains situation with the 2-out-of-5-years rule, but I decided to give https://taxr.ai a try after reading about it here. What a game-changer! I uploaded my job offer letters, closing statements, and rental agreement, and within minutes I had a complete analysis of my exact situation. The tool confirmed I qualified for the unforeseen circumstances exception and calculated my precise partial exemption amount. It even generated a detailed explanation document citing the relevant tax codes that I can keep with my records in case of an audit. I'm so much more confident filing now that I have this documentation backing up my position.

After dealing with a frustrating partial exemption situation similar to yours, I finally gave up trying to get answers from the IRS website and tried calling them directly. Absolute nightmare - was on hold for over 3 hours before being disconnected! Then I found https://claimyr.com - it's a service that basically waits on hold with the IRS for you, then calls you when an actual agent is on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c Got connected with an IRS agent in about 45 minutes (while I continued working) who confirmed that yes, you can claim the partial exemption even after renting the property, as long as the primary reason for moving was the job relocation. The agent explained that the clock starts ticking from when you move, not from when you start renting it out.

I owe everyone here an apology. After calling Claimyr a scam, I decided to try it myself since I was getting desperate for answers about my own capital gains situation. I had to eat my words - the service actually worked exactly as described. I received a call back in about an hour with a real IRS agent on the line. The agent confirmed everything the original poster was asking about. If you moved for a qualifying job relocation (>50 miles) and lived in the house for 18 months, you absolutely qualify for a 75% partial exemption of the $500k limit. The fact that you rented it out before selling doesn't invalidate your claim as long as you can document that the job change was the primary reason for moving. The agent also mentioned to be sure to fill out Form 2119 correctly when filing, and to keep all documentation related to the job change and move for at least 3 years after filing.

One thing nobody's mentioned yet - you need to be careful about depreciation recapture since you've been renting the property. Even if you qualify for the partial capital gains exclusion, you'll still owe taxes on any depreciation you've claimed (or should have claimed) while it was a rental property. This is taxed at a 25% rate, not your regular income tax rate. Also, make sure you're calculating your "profit" correctly. It's not just sale price minus what you paid. You need to account for selling costs, improvements you made to the property, and potentially that depreciation I mentioned.

Has anyone dealt with proving the "unforeseen circumstances" part of this? We're in a similar boat but our move was due to a family health issue, not a job change. We lived in our home for 22 months before having to move to care for an ill parent. Trying to figure out if we qualify for a similar partial exemption.

Just wanted to add one more consideration that I learned the hard way - make sure you understand the timing of when your "2 out of 5 years" period is measured. The IRS looks at the 5-year period ending on the date of sale, not when you moved out. So if you sell in 2024, they look at 2019-2024 to see if you lived there for 2 years during that window. In your case, since you lived there for 18 months and are selling relatively soon after moving, you're clearly within the window. But I've seen people get tripped up thinking the 5-year period starts when they moved out, when it actually ends when they sell. Also, regarding the depreciation recapture that Yuki mentioned - don't forget you can potentially offset some of that with any capital improvements you made to the property while living there. Keep receipts for things like new HVAC, roof repairs, major renovations, etc. Those can be added to your cost basis and reduce your overall taxable gain. Good luck with the sale! Sounds like you've got a solid case for the partial exemption.