What documents will I need to prove that I moved over 50 miles for employment to avoid capital gains tax?

[kayla9800]

We plan to sell our home in WA and move to NC. We have only lived here for 1.5 years and I understand if you move for a job 50  miles away that you aren't subject to the large tax. My question is, before we sell the house, do we need an offer letter dated before the sale occurred? We will be selling in March and moving right after that. The offer letter will come within the month we get there. When i file my 2022 taxes what documents are they going to ask for to prove that we sold to move for a job?

[AmeliesUncle]

The change of employment must be while the house is your Principal Residence.

The way you are describing it, you don't have the job yet.  You are moving, THEN getting a job.  If that is the case, it would not qualify for the exclusion.

[kayla9800]

So we need to tell the employer that we need the offer letter before we sell our house? Is an offer letter the only way you prove that?

[AmeliesUncle]

You need to prove that you got a job while it was your main home, and that is why you are moving.

Getting an offer letter before you put the house up for sale would be the best way to prove that.  But if you can come up with other proof, great.

[Opus 17]

First, you don’t get a blanket tax exemption.    If you sell your main residence and you owned it for at least two years and lived in it for at least two of the past five years, you can exclude $250,000 of capital gains or $500,000 of gains if married filing jointly.  If you sell in less than two years for one of the allowable reasons, you can claim a partial exclusion. Let’s say you owned the house for 18 months, that would be 75% of two years so your exclusion would be 75% of $250,000 ($187,500) or 75% of $500,000 ($350,000).  If your gain is more than that amount, you will still owe capital gains tax on it.

Second, you do not send any proof with your tax return. You would keep any proofs for at least three years after you filed in case of audit.

Third, you just need to show that you moved early because of the new job.   I am sure you have lots of emails and other paperwork documenting your job search and your new job offer, otherwise you would be selling your house and moving blindly.  Don’t overthink it.

(If you are selling blindly and hoping to get a new job in your new city but don’t have one lined up, you might still qualify for the partial exclusion. Publication 523 is not specific, and I would need to research this more thoroughly.)

[kayla9800]

This helps ALOT! Thank you!

Lets say I do sell and move without the offer letter - I'll have owned the home for 17 months. I purchased it for 370k and will be selling for 470k, after agents are paid i think i will only be making max 50k, which is far less than 250k. Since this is such a low number do you think i would maybe be covered by a partial exclusion if i don't have a job lined up ahead of time?

I greatly appreciate your help. I've been asking many people for help on this and you have finally given me an answer that helps me understand my choices!

[Opus 17]

@kayla9800 

OK, this gets a bit esoteric so be patient with me.

There is a general rule that says that if you sell  your primary residence in less than two years due to unforeseen circumstances that are the primary reason for moving, you can qualify for a reduced exclusion.  There is also a list of safe harbor provisions, which are circumstances that will be deemed to satisfy the regulation.  One of the safe harbors is that you sold your home because of a change in the location of your employment. The regulations say that this change must occur while you still own your primary residence (I looked it up and it does say that).  So in order to meet the safe harbor conditions, you would have to have the new job offer in place before you sold your former home.

You don’t have to meet the exact safe harbor conditions if you can show by your specific facts and circumstances that the primary reason for selling your home early was a change in your employment location.  But this will be harder to show if you are moving before you have a job offer.  

Essentially, you don’t get the partial exclusion if you are selling early so that you can move closer to your children, or for better weather.  If that is the primary reason you are moving, then you should either wait the full two years, or you sell early and pay the capital gains taxes.

If you can show by your specific facts and circumstances that the primary reason for selling early was a job change or another unforeseen circumstance, then you can qualify for the exclusion even if you don’t meet the safe harbor because you did not have the specific job lined up in advance.  

I will make up one imaginary scenario, and you can to use as a guide to whether your situation meets the unforeseen circumstances rule.  Suppose the company announces they are closing their Washington branch and offers everyone relocation to Texas. But you don’t want to move to Texas, and you have family in North Carolina. You have an unforeseen circumstance because if you remained in Washington, you might not be able to afford your home, and you will have to move someplace sooner or later anyway. The primary reason for selling is the closing of the branch where you worked. You decide to move to North Carolina and you eventually find a new job there.  The situation is such that you were forced to move due to an unforeseen circumstance, even though it does not meet any of the exact safe harbors.  

Hope this helps.  

[vinni3c]

What if I joined a company during the pandemic and want to relocate to near an office now that offices are opening up.

I'm in a similar situation as OP where I've living in my current home for 1.5 years and want to move back to where my company has an office. Does it have to be a mandatory move required by the company and would someone need proof/documentation of that?

[Opus 17]

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@vinni3c wrote:

What if I joined a company during the pandemic and want to relocate to near an office now that offices are opening up.

I'm in a similar situation as OP where I've living in my current home for 1.5 years and want to move back to where my company has an office. Does it have to be a mandatory move required by the company and would someone need proof/documentation of that?

---

You must change the location where you work (the physical location of your main job) by at least 50 miles.  The change does not have to be mandatory.  If you claim the partial exclusion and are audited, you only have to show that you changed the location of your work. 

[holmedw]

@Opus 17 

If I sell my home for $210, 000 that I brought for $162,000.

-I put $6,000 of repairs into is.

- Commission for agent is around 6% = $12,600

-Closing costs for home = $6,300

Live in home for 14 of the 24 months.

Received $7,500 Georgia dream home downpayment assistance.

Moving away to another state (further than 50miles away for a new job).

 Could you please let me know what I should have to come out of capital gains tax and recapture tax?

[Mike9241]

since you qualify for the partial exclusion for the home sale because of a job move. the new place of employment is at least 50 miles farther from the taxpayer's old home than the former place of employment was.

so if your old place of employment was 25 miles from your old home then the new place of employment must be 75 or more miles from the old home 

assuming you qualify and are single living in the old home for 14 months would entitle you to an exclusion 

of 14/24 * $250,000 or over $145K. repairs don't count. if you rented after having lived in it, any depreciation allowed or allowable would be subject to section 1250 recapture and is not eligible for the exclusion.

if you owned and rented it out before you made it your primary residence the exclusion is computed differently.

1) period of nonqualified use  = to the period after 2008 you owned it but it was not used as your principal residence  

2) total ownership period 

3) total gain 

4) nonexcludable gain = 1 divided by 2 times 3 

depreciation recapture still applies. 

[Opus 17]

@holmedw 

Since you appear to qualify for a partial exclusion of $145,000, based on the need to relocate for a new job, your capital gains will not be taxable because no matter how they are calculated, they are less than $145,000. However, I want to correct several aspects of your calculation, for your benefit as well as future readers.

First, when determining the cost basis for your home, you start with the purchase price and you can add some but not all of your closing costs from the purchase transaction. Allowable closing cost adjustments are listed in publication 523. You must subtract the down payment assistance from your cost basis since that was free money to you.   https://www.irs.gov/forms-pubs/about-publication-523

Repairs do not add to the adjusted cost basis, but improvements do increase the cost basis. The difference between an improvement and repair is that a repair maintains the property in as-is condition, while an improvement adds value to the property, makes it better, or extends its useful life and function. For example, fixing a hole in the roof caused by a fallen tree limb is a repair but replacing the roof so you get a new 15 year life out of it is an improvement.

Then when determining the selling price for the capital gain calculation, you may subtract your real estate commission and some of your closing costs but not all of them, again, there is a list of allowable closing costs in publication 523.

Your capital gain appears to be about $40,000 but the exact amount can’t be calculated without knowing more details about the repairs and the closing costs that you listed. But, since you appear to qualify for an exclusion that is well over $40,000, your capital gain will not be taxed in this situation. If you received a 1099S form at the closing, you will still be required to report the sale on your tax return but no tax will be owed. 

[Edited to add comment: I corrected some crazy dictation errors.  Apparently, talk-to-text is not reliable when you have just had a filling at the dentist and half your mouth is numb.]

[holmedw]

@Opus 17 
Just to be clear. I shouldn’t be taxed federally or locally for capital gains tax? I wouldn’t pay any capital gains tax at all, correct? Because my capital gains is less than $145,000 due to the out of state job exemption?

I get confused when the verbiage for the capital gains tax exemption says partial exemption. Does it say partial exemption. I guess it’s only partial exemption if the capital gains is over. Does my annual income being $76,000 have effect on anything?

[Opus 17]

@holmedw 

Your gain seems to be about $45,000, and because you lived in the house for about 58% of the time required to qualify for the full exclusion, and you moved out for one of the covered reasons, you qualify for a 58% exclusion.  Fortunately, that does not mean you can exclude 58% of your own gain, which would mean you would still pay tax on about $20,000. It means that you can use 58% of the normal exclusion limit. Since the normal exclusion limit is $250,000, you can use an exclusion of about $140,000, and since your total gain is less than your revised exclusion, none of the gain is taxable. 

Most state income taxes are “conforming“, this means that they conform to the federal definition of taxable income. Since your gain is not included in your federal taxable income, it will not be included in your state taxable income either.  I suppose there might be a non-conforming state that will want to tax your gain, you would have to research your own state income tax laws. I am not aware of any state that will tax your gain, but there might be something in state law that I am not aware of.

Your income does not affect your qualification to use the partial exclusion because you moved out early due to a job change. If some of your gain was taxable, then your income would affect your capital gains tax rate.

[jwpruitt382]

This might be a strange question but: 

My husband got a promotion within his company.  His job base is 50 miles further from the house then his old job base, but: 

1) He works from home

2) We moved to a house that is further away 

The reason we moved, was because in the house we sold we shared an office.  When we bought the house, he didn't work from home, so us sharing an office for our free time wasn't an issue.  With him working from home permanently with the new job, and me working at home occasionally, we believed it would be better for him to have his own dedicated office space so we wouldn't interfere with each others work.  We moved about 10 minutes further away from his new job base than our old house, into a house with an additional room that would serve as his office, but a commute wasn't the work related reason why we moved.  Will we still qualify for a partial exclusion?