Is vandalism by a neighbor qualify as “unforeseen circumstance” under capital gains?

@Catchasoundset 

The law (Section 121c of the Internal Revenue Code) allows partial exclusions of gain where "such sale . . . is by reason of a change in place of employment, health, or to the extent provided in regulations, unforeseen circumstances."

Unforeseen circumstances is extremely broad and allows the IRS to look at case by case circumstances.  

Be prepared to validate your claim.   Nobody can tell you outright if you would win.

The IRS has ok'd this case in the past but, that can no way be used to validate your claim: "

X, a member of a taxpayer's family and an inhabitant of the taxpayer's house, was convicted of a crime, placed on probation and spent one year at a rehabilitation facility. While X was in rehab, the taxpayer bought a new house, which became the principal residence. According to the facts, when the house was purchased, the taxpayer expected that X would not live there permanently.

However, after one year, the court ordered X to live at the home under house arrest and to continue receiving rehabilitation counseling. The neighbors began to vehemently protest X's presence, and even interfered with X's efforts to find a job. X's probation officer recommended that the house be sold so that the family could move to another neighborhood.

The taxpayer sold the house before the full two-year period for living in and owning it had elapsed.

The IRS concluded that the primary reason for the sale of the house was an unforeseen circumstance, and allowed the taxpayer to exclude gain up to the "reduced maximum exclusion" amount. (IRS Private Letter Ruling, 200403049. Such private letter rulings are binding only on the taxpayer who requested the ruling, and may not be cited as precedent for other such tax cases. Nevertheless, they do indicate the thinking of the IRS.)"

Hope this was helpful. 

Q.  Is vandalism by a neighbor qualify as “unforeseen circumstance” under capital gains?

A. Simple answer: Yes.  But, more accurately, "probably", as explained at the other replies.

Q. Curious what the "exclusion" percentage might be?

A.  It's not actually an exclusion percentage or prorated exclusion.  When you fail to meet the 2 year rules, but are claiming an exception for “unforeseen circumstances", you are allowed a reduced maximum exclusion.  It's best explained by example. If you only lived there 8 months, the maximum you could exclude would be 8/24 x $250,000 = $83,333.  So, as long as your gain was less than $83,333, you would be allowed to exclude the entire gain.