Probably. However, they might be able to sell a prorated exclusion to a sypathetic auditor who was in a good mood. Warning: what follows is pretty agressive.The law says that a prorated exclusion applies if the move was due to a change in health, employment, or other unforeseen circumstances as prescribed by regulation. Since the IRS hasn't issued such regulations 4 years and counting after the law was enacted, I don't think it's totally unreasonable for people to start defining them for themselves.Also, the law makes no connection between the home gain exclusion and the employment requirements for deductible moving expenses. Thus, if one of you spent a week as a Stepford Greeter at Wal-Mart in Florida, there you have a change in employmentThey moved four years ago, and not (it would appear) to Florida. So it would be difficult to make a case that the sale was do to the move. But an equally aggressive but maybe quite reasonable approach might be to claim the 'children' were justing 'staying' with the folks and never did change their principal residence. So they would be entitled to a full exclusion. Or sell the elderly parents place to the grandkids, and convert the childrens' house to a (real) rental. Or boot the grandkids ( who need to get real), do a couple of refis and wait for the inevitable.
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