Reduced Maximum Exclusion Code Sec. 121(c)(2) provides for a reduced maximum exclusion for a taxpayer who sells or exchanges his or her principal residence but fails to meet the use-and-ownership requirements or the two-year limitation.
In order for a taxpayer to claim a reduced maximum
I.R.C. § 121 (c) (2) (B) — such sale or exchange is by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances. I.R.C. § 121 (d) Special Rules
It works like this….
You lived in it one year of the last 5 from date of sale…… so, you met one half of the requirement to exempt the gain. A single person has the full exclusion of $250k. You only have an exclusion of $125k.
We calculate the gain to be $70k. The only issue you have is depreciation recapture. If you took $20k of depreciation, you have to recapture it (taxable).
So, of the $70k gain, $20k is recaptured and the difference of $50k is exempt.