If Holly had sold her home earlier, or if they had waited until 2000 to sell their joint home, they would have qualified for the full exclusion. In December 1998, Bob moved out of the home that they had both purchased in 1997. The divorce proceedings got ugly and complicated, and dragged on and on. While still legally married, Bob and Sue sold the home in November 2000. And, even though they filed a joint tax return for 2000, they will not receive the benefit of the full exclusion.
Proper planning can save hundreds of thousands of tax dollars.
Improper planning can cost you just as much. But, your exemption will be limited based on an IRS formula. I'll explain the computations for the reduced exemption, but you might find it easier to first download IRS Form 2119 . Form 2119 has a nice little worksheet and instructions that will help you walk through the computations. When looking at the home ownership days, remember that if one spouse owned the property longer than the other, both spouses are treated as owning the property for the longer period of time.