@k2kennedy
The risk I see in your case is not with the definition of "hardship" but with the definition of principle residence. Based on your story, I think it is reasonable to consider the beach house your main home from the shutdown until Sept 2022. After that, it might still be your spouse's main home but I don't think it is your main home any more, if you spend more of your time in the city because of schooling, and go the beach on weekends. (Especially because, you are not renting a temporary place in the city for school, you are returning to your previous main home.)
I'm going to look at this from a skeptical point of view, so you can the see kind of arguments that might be made against you, if you were unlucky enough to be audited.
Scenario one. Your spouse moves back to the city, you list the property immediately and you sell it. Your reason is the pay cut. Being married imparts ownership but it does not impart residency. I will assume you made the beach house your main home on July 1, 2021. You have 13 months residency as your main home and your spouse will have 19 months if he lives there until the sale. Your half of the gain is $150,000 and you can use a 54% exclusion, so $135K is excludable (54%x $250,000) and $15K is taxable. Your spouse can use a 79% exclusion, so their entire $150,000 gain is excludable. This seems reasonable to me.
Scenario two. Your spouse continues to live in the property to meet the full two year rule. His exclusion is $250,000 but you don't meet the 2 year rule at all, so $50,000 of the gain is taxable on a joint return, unless you claim a hardship (because being married imparts ownership but it does not impart residency). How could you claim a hardship due to pay reduction if your spouse was able to live in the home for a further 6 months before listing it? You can't really claim a hardship for job change because the sale is not really because of the job change, if the sale is happening a year before the job change.
What about your home in the city? Will that not also have a capital gain? If you use the exclusion on the beach house, you can't use the exclusion on the city house for 2 years, unless you claim a hardship again. And if you have a hardship that forces you to sell two main homes, then were they really both main homes?
Potentially, if you lived apart for a few more months, you could sell the beach house and exclude half the gain using your spouse's $250,000 exclusion, and then in 2024 sell the city home and exclude half the gain, using your exclusion.
You need to think about your city home, and then you may want to see a local professional tax planner.
The IRS says this:
An individual has only one main home at a time. If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a "facts and circumstances" test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well. They are listed below. The more of these factors that are true of a home, the more likely that it is your main home.
• The address listed on your:
-
U.S. Postal Service address,
-
Voter Registration Card,
-
Federal and state tax returns, and
-
Driver's license or car registration.
• The home is near:
-
Where you work,
-
Where you bank,
-
The residence of one or more family members, and
-
Recreational clubs or religious organizations of which you are a member.
https://www.irs.gov/pub/irs-pdf/p523.pdf
