Hi BP -

A friend bought a home about a year ago and in that time discovered the neighbors are drug addicts. With the addictive behavior has come vandalism, discharging of firearms, threats of violence, etc. to the point where my friend was able to obtain a restraining order against the neighbors.

My friend wants to sell. Is it possible for the extenuating circumstances (lots of calls to police, restraining orders etc.) to qualify as some sort of exception to the 2 year residency rule to avoid capital gains?

@Bill Schrimpf , yes. In Ltr. Rul. 200403049, the IRS held that the hostility of neighbors qualified as unforeseen circumstances resulting in the availability of a partial gain exclusion.

Thank you @Ashish Acharya .  Can you give any general guldance on how to take the exclusion (is there a seperate form, etc.)?  I've asked a few people and your the first to shed some light on the situaton.

@Bill Schrimpf , there is no separate form,but you have to attach a statement showing the ownership period and calculating the exclusion amount. Most of the tax software will ask few questions that automatically does the calculations and attaches the statement with the return. 

Originally posted by @Ashish Acharya :

@Bill Schrimpf , there is no separate form,but you have to attach a statement showing the ownership period and calculating the exclusion amount. Most of the tax software will ask few questions that automatically does the calculations and attaches the statement with the return. 

 Thanks again!