Suppose a person has lived in their primary residence for one year. Then he moves to an assisted living facility in the same town. He keeps their residence, and does not rent it out.
One year later he wants to sell it. Technically he has not lived in the home 2 years out of the last 5, the criterion for taking the $250,000 gain exemption on the sale of a home. However, he did not change the address on his driver’s license, voter’s registration, and continued to pay upkeep on the home.
Does the fact that he did not physically live in the house for that year mean he can not take the exemption?
The exemption requires that the house be your primary residence for 2 of the last five years. Your primary residence is the place where you live the majority of the time. Simply having bills sent to a house does not make it your primary residence.
Unless he is audited, the IRS will probably not know that the house was not really used as his primary residence. If he is audited, the IRS will figure out that he hadn’t really lived there in the past year. They’ll dig into his entire life until he admits that he was pulling a scam.
The penalties for committing tax fraud are severe. It’s probably not worth the risk, especially when all he’s trying to save is the tax on one year’s worth of appreciation in the house’s value. It’s quite possible that he would not owe any tax at all anyway - his cost basis may be more than what he would get when he sells.
I believe there are exceptions in the primary-residence capital gains exclusion rule for certain circumstances, such as the situation posed by the OP. Check the IRS web site and the appropriate publications for details.