As this case demonstrates, a taxpayer sold his main home for $1.4 million, taking $250,000 down and a note for the balance. He claimed the $500,000 exclusion to reduce the taxable gain on each payment he got. The buyer defaulted on the note and the seller reacquired the home.
The Tax Court says the seller owes capital gains tax on the payments he received from the buyer, less any gain that he previously reported. He can’t use the $500,000 exclusion to cut this tax liability (DeBough, 142 TC No. 17). There is an exception if the reacquired house is quickly resold. If the home is resold within a year of the date it is transferred back to the seller, the reacquisition is ignored and the seller is permitted to claim the home sale exclusion on the resale.