Q: I bought a foreclosure in 2004. We remodeled the property and planned to live there.

After we moved in, my wife found that due to her hip bursitis and chronic back pain she couldn’t navigate the steep stairs inside the house or the hill outside.

We sold house in 2005, and we made some money due to the upgrades we put in. Is there anyway to shield the capital gain from taxes?

We haven’t sold another home in 6 years and were planning on living in the one we sold. My wife still has these medical problems.

A: If you and your wife sold because you wanted to maximize your gain, then I don’t think I’d be able to help. The IRS rules regarding the tax-free exclusion say you must live in your home for 2 of the last 5 years, and you must not have used the exclusion within the past 24 months.

However, the IRS has recently clarified its rules relating to how much gain you can exclude in certain circumstances, including death of a spouse, accepting a new job in another location, divorce and medical issues.

The new rules say that if you must sell your home because of one of these reasons, you keep a portion of the gain tax-free.

In your case, since you lived in the house for a year, or half the time to keep the entire amount of gain tax free (up to $250,000 for single individuals and up to $500,000 for married couples), you may be able to keep half of those amounts tax free. If your wife’s medical condition got worse after you moved into the home, you should have a better ability to exclude the gain due to the medical issue.

In your case, that would be up to $125,000 if you were single or up to $250,000 as a married couple.

Your tax preparer or accountant can advise you further, including what paperwork – if any – you’ll need to provide to the IRS.

Good luck finding another house where everything is on one level.

Published: Mar 14, 2006