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There are two parts of the reporting of the sale of a residence:
In order to qualify for exclusion you must have lived in the home for two years and owned the home for two years (five years if you acquired the home in a tax deferred exchange). For a married couple, only one needs to own the home although both must have lived there for at least 2 years. For a divorced couple, only one needs to live in the home although both must own it.
You can only claim this exclusion once every two years, however, if you sell your home before the two year period is completed, you may qualify for a reduced exclusion.
The application of the exclusion is automatic unless you elect not to use the exclusion. You can change your election with an amended return.
It is possible (but not likely) that you could sell a second home within the two years following the sale of the first one and have the exclusion apply. In this case, if the exclusion on the second home was significantly more than on the first one, you would have to amend the return for the first home and pay the tax plus interest. For this reason, if you were unable to exclude substantially the full amount ($250,000/$500,000) on the first home and believe you might qualify for the exclusion on another home within two years, you consider not applying the exclusion to the first sale.
Please call us if you have any questions about this election.