Can a taxpayer qualify for a Section 121 exclusion if the home sale occurs less than two years after the purchase?
The HOME screen should be used only if the taxpayer qualifies for the exclusion. See Pub. 523, Selling Your Home before you complete the HOME screen to calculate a Section 121 exclusion. A taxpayer who does not meet the two-year ownership and residence tests (out of the last five years) may still qualify for a reduced maximum exclusion under some circumstances. However, the fact that the software calculates a reduced exclusion for a gain on the sale of a main residence does not answer whether the taxpayer qualifies for it. You must determine if the taxpayer qualifies for any calculated exclusion.
The calculation results are shown on WK_2119, which displays the three worksheets described in Pub. 523. You can exclude up to $250,000 of gain ($500,000 if married filing jointly) on the sale of your home if you meet the Eligibility test. Pub. 523, p. 3.
The software calculates the exclusion based on the number of days the home was owned and used as the main residence and calculates a reduced maximum exclusion if the ownership and use falls below two years. Some taxpayer qualifications that are necessary for the reduced exclusion (described in Pub. 523) are not considered in the calculation. That's why you must confirm the results.
If an exclusion is calculated but the taxpayer does not qualify, you can check the HOME screen option Does not qualify for exclusion (Carry gain to Form 8949/Schedule D) to report the gain.