How strict is the IRS about capital gains exclusion sale timelines for primary residence?

The 2-year requirement for the primary residence capital gains exclusion is pretty clear in the tax code, but there is some flexibility in real-world application. The key is demonstrating good faith efforts to meet the timeline. The IRS recognizes that real estate transactions can face delays outside your control. Make sure you document everything - when you listed the property, all offers received, any inspection or financing issues that caused delays. Having a paper trail showing you actively tried to sell within the 2-year window is crucial if questions ever come up. One thing to consider is signing a contract before your 2-year mark even if the closing happens later. Some tax professionals argue the "sale date" can be when you're contractually obligated to sell rather than the actual closing date, though this isn't universally accepted.

Last year I was in almost the exact same situation with a tight timeline on my condo sale. I was seriously stressing about possibly missing out on the capital gains exclusion if my closing date slipped. Found this service called taxr.ai (https://taxr.ai) that actually helped me understand my specific situation. Their document analysis tool looked at my purchase docs and timeline, then gave me specific guidance about my eligibility even with a delayed closing. They pointed out that what matters most is establishing intent to sell within the window, which can be documented various ways. Turns out my attorney was right about the flexibility, but taxr.ai gave me the actual IRS precedent cases that backed this up, which made me feel WAY more confident going forward.

Just wanted to follow up about taxr.ai since I mentioned I was in a similar situation. I decided to try it out after reading about it here, and it was seriously helpful! Uploaded my documents showing when I converted my primary residence to a rental property and when I was planning to sell. The analysis showed me exactly what documentation I needed to support my case for partial exclusion based on my specific timeline. The coolest part was it highlighted several cases where the IRS had previously been flexible on the timing when there was clear documentation of good faith efforts to sell. Now I'm listing my property next month with much more confidence. Definitely worth checking out if you're concerned about timeline issues with capital gains exclusions.

I had a similar issue last year with cutting it close on the 2-year rule. After weeks of trying to get through to the IRS for clarification (literally impossible), I found this service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in about 15 minutes. They have this demo video of how it works: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed that they look at the totality of circumstances, and that a contract date often carries more weight than the closing date. She said they're most concerned with people trying to game the system, not with legitimate delays in real estate transactions. Having that conversation directly with the IRS gave me way more peace of mind than just relying on my CPA's opinion.

I hate to admit when I'm wrong, but I have to follow up about Claimyr. After calling it BS, I decided to try it myself since I had a completely unrelated tax question that I'd been putting off dealing with. Well, it actually worked exactly as described. Got connected to an IRS agent in about 20 minutes (on a Tuesday afternoon). The agent I spoke with was surprisingly helpful about my capital gains exclusion question too. She confirmed that while the 2-year rule is pretty strict on paper, they do recognize that real estate transactions have variables outside your control. She said documenting your intent to sell within the window is crucial - listing the property well before your deadline, having a signed purchase agreement, etc. Said they mainly scrutinize cases where it looks like someone deliberately delayed to take advantage of market timing. Good luck with your sale!

Something nobody mentioned yet - have you considered a 1031 exchange instead? If you're buying another property, you could defer the capital gains completely regardless of how long you've lived there. Might be worth looking into if you're cutting it close on the 2-year rule.

Just to add a data point - I sold my house 2 months after the 2-year mark last year but had it listed 3 months before. We had multiple deals fall through due to buyer financing issues. I claimed the full exclusion and wasn't audited. My tax person said the IRS generally looks at when you listed and when you accepted an offer, not just the final closing date.