I have an unusual situation. 3 years ago I had to move from my home because of a job change. I had lived in the home approximately 15 months. I still have not sold the home as it is more of a commercial area and should bring a good price.

I moved and built anothe home that took 18 months to build. My companies business took a downturn and I lost my job. I found another job and had to move again. The second house sold after I owned it for only 3 or 4 months. I made money on the second house but probably only 1/4 make on the original house.

Here is my question. Given the exclusion of taxes for living in ahome 2 years and selling and the clause that pro rates the exclusion if you have to move because of a job change. What should I do? Do I take the exclusion on the second house and risk the larger profits of the first? Am I entitled to exclusion on both?

If I'm wrong someonee will correct, but I don't think you are entitled to an exclusion on either.
For an exclusion the house must have been your principal residence for 2 of the preceding 5 years.
The first house was your residence for 15 months. The second you only owned for 3-4 months.
Neither was your principal residence for 2 years.
Therefore, I don't believe you qualify.
Best wishes, Chris

Warning, stream of conciousness post. Some tax problems are interesting intellectual exercises, and this seems to be one. I've changed my mind several times while writing it. However, if I paused to get my thoughts straight, evil AOL would kick me off.

Crosenfield:If I'm wrong someone will correct...

You're wrong. You can pro-rate the exemption based on the fraction out of 365 x 2 = 730 days you have lived there, provided there is a good reason. A job-related move is one good reason. We had a discussion about this a while back, and the question arose as to whether moving to take a new job was good enough, as opposed to being transferred by the same employer. I guessed no, but the consensus was yes. So let's say Yes is correct.

The question I had while composing a reply, was When did Trexfool sell House #2? If it was in 2000, then he has until April 15 to make a decision. If it was in 1999 or earlier, he is going to have to file a 1040X, and maybe come up with some big late taxes, penalties, and interest. Since Trexfool is vague on times, we don't know.

Assuming Trexfool did sell in 2000, the question arises as to how long he can wait. I think the financially best thing is the following. But then, I'm not a lawyer or a CPA, and I don't even play one on TV, and this is one I would certainly go to a professional for advice on.

I think the pro-ration on House #2 is not much, and by taking it he would effectively preclude himself from taking the pro-rated exemption on House #1[*]. That's because of the two year timeout period between taking exclusions. It's been 4 years and 3 months (roughly) since he bought House #1, so his exclusion, even if pro-rated, starts self-destructing in 9 months.

So, if Trexfool bites the bullet and pays the tax on his gain on House #2 on April 15, then he has at least 9 months to see how House #1, which he has not sold, appreciates. Then, his problem is to decide whether any additional gain outweighs the diminution of the exclusion if he waits beyond those 9 months.

[*] Except as I write this I now suppose that the 2 year clock starts ticking on the date of sale of House #2, not on April 15, 2001. That makes the second exclusion possible in maybe a year, so the lost exclusion on House #1 might not be all that much.

JABoa writes (in part):

Then, his problem is to decide whether any additional gain outweighs the diminution of the exclusion if he waits beyond those 9 months.

I reply:

If I understand the facts correctly, the exclusion isn't "diminished" in 9 months; it disappears entirely because the poster will no longer have used the house as his or her principal residence for 2 of the last 5 years. I do not believe this requirement can be pro rated. --Bob

Bob78164:I do not believe this requirement can be pro-rated.

Time to flog Dobbin again.

If you fail to meet the customary 2 year requirement, then you can pro-rate if you left because of a job change. The question I raised was if the qualifying time of pro-ration disappears on a sliding scale, as the 5 year window moves forward.

Let's take a hypothetical example. It's hypothetical because it's mostly false, but there are elements of truth to it. A homeowner, let's call him JBBoa, has lived in his place as his principal residence for many years. He gets laid off and has to move to Ruffalo to get a new job that allows him to do important things, like eat. He rents the place out. All is well for 5 years: if he sells he can take the full exclusion.

Now, let time advance 7 months, and JBBoa sells. Did JBBoa live in his place for 2 of the last 5 years? No he didn't, he only lived in it for 24 - 7 = 17 months of the last 5 years. Did he have to move because of a job change? Yes he did. Is he therefore entitled to a pro-ration of the exclusion, in the ratio 17/24? I think so, but <insert my usual disclaimer here>.

If JBBoa had not moved to Ruffalo for job-related purposes, but merely because the cost of living is a lot cheaper in Ruffalo than it is in Roston, then it's clear to me there would be no exclusion at all after the 5 years and 7 months of the previous paragraph.

JABoa writes (in part):

All is well for 5 years: if he sells he can take the full exclusion.

I reply:

All is well for three years, not five. After that point, the passage of time means that JBBoa has not lived in the house for two of the last five years.

I had not seen previous discussions on whether the qualifying time can be pro rated when it expires due to the passage of time, if the original move was due to a change in job location. My instinct is that it could not be pro rated, but I have nothing at all to back up that instinct. --Bob

Bob78164 writes, in part, correcting me:

All is well for three years, not five.

I reply

Bob is right.

I will call this a "slip of the brain". As an instructor in mathematics, I used to explain to my classes that when they did something incorrect, it was a mistake. When I did something incorrect, it was a slip.

Slippery,
JABoa

I have located a rare photograph of contributors to the Tax Strategies board after a hard day of posting. Here it is:

www.carygrant.net/fotogallery/gungadin/gd13.jpg.

L-R: JABoa, pmarti, Bob78164.