The IRS has relaxed its criteria somewhat for when homeowners can exclude capital gains on the sale of their home.
You may be able to exclude from income any gain up to $250,000 ($500,000 on a joint return in most cases) on the sale of your main home. However, this exclusion is only available if you owned the home and used it as your main home for at least two years.
Under a new IRS revisions to the rules, if you owned and lived in the property as your main home for less than two years, you still can claim an exclusion in some cases. Generally, you must have sold the home due to a change in place of employment, health, or unforeseen circumstances. The maximum amount you can exclude will be reduced.
"Unforeseen circumstances" can include: inability to pay the mortgage or basic living expenses without the sale, due to a death, divorce or change in employment status.
Tax filings from 2000 through 2003 may be eligible to be amended to take a partial capital gains exemption.
See IRS Publication 523, Selling Your Home, for more information.