Partial Exclusion of Gain for new job when laid off

[dseilkop]

First time home purchase in August 2022 . This house was 25 miles from my work. I was part of a group of layoffs in November 2023. Found a new job with a new company 65 miles from my home and started working Jan 2, 2024. I never applied for unemployment. I am getting tired of the 1 hour 10 min commute, but if partial exclusion is not guaranteed I might deal with this commute till August to sell. 

When I read the qualifications for Partial exclusion of gains due to work related move I get confused which bullet point is meant for someone who is laid off.

You took or were transferred to a new job in a work location at least 50 miles farther from the home than your old work location.

I can clearly see I don't meet the first bullet of the work being 50 miles farther than my last job (65-25=40), but IS the first bullet point meant for me if I got laid off? or would the lack of employment in December put me under the second bullet point of:

You had no previous work location and you began a new job at least 50 miles from the home.

Would any amount of severance pay screw this up? Would I have had to actually apply for unemployment to count as "no previous work location". How does the IRS actually define if I had a previous work location?

[AmyC]

1. Severance pay means you had no job location.

2. No, you are not required to get unemployment

3. The IRS also looks at unforeseen circumstances along with work location. You had no expectation of losing your job or being forced to find a new one. You have paychecks from work until you didn't. There is a definite end date and you probably have some other paperwork, like severance pay to show you had no job. Your new work location is over 50 miles from your home so your should qualify under the - no previous work to new job - bullet.

[Opus 17]

See publication 523 on page 6. 

https://www.irs.gov/pub/irs-pdf/p523.pdf

The IRS publishes several "safe harbor" rules -- if you meet these circumstances, they will assume you qualify for a partial exclusion.  You don't meet the safe harbor because your commute from your old house to your new job is not 50 miles longer than your commute from your old house to your old job.  However, you may still be able to claim a partial exclusion if you can show by your unique facts and circumstances that keeping the old house was financially or in some other way unreasonable.  Don't send proof with your tax return, but keep it with your important tax papers for at least 3 years in case of audit.  

[dseilkop]

I understand that they seem to leave it open for special circumstances, but I would really like a safe haven guarantee when looking at a potential 5 figure capital gains bill. Especially since the only evidence or unique circumstances is gonna be my gas receipts for my poor gas mileage van…

So hypothetically, who would qualify for the second safe haven bullet point of “no previous work location” to get the flat 50 mile rule? Someone who has never had a job while living at that residence? You’re saying someone could have a month of work after buying the house, followed by 18 months of unemployment leading up to a sale and move for work, then they would technically have a previous work location and would have to be 50 mile farther than that last job?

Only reason I am questioning or challenging you on this is because someone else commented that my 1 month of unemployment would put me under the second bullet point safe haven of no previous work location.

[Opus 17]

I am not an attorney or CPA, but I don't believe 1 month of unemployment is the same as "no previous work location."  Tax codes and rules are supposed to be interpreted according to their plain language meaning, unless they are specially defined otherwise.

The only safe harbor that would qualify you for the partial exclusion is here,

You meet the standard requirements if any of the following events occurred during the time you owned and lived in the home you sold.

You, your spouse, a co-owner of the home, or anyone else for whom the home was her or his residence:

1. Died;

2. Became divorced or legally separated, or were issued a separate decree to pay maintenance (support) to the other spouse;

3. Gave birth to two or more children from the same pregnancy;

4. Became eligible for unemployment compensation;

5. Became unable, because of a change in employment status, to pay basic living expenses for the household (including expenses for food, clothing, housing, medication, transportation, taxes, court-ordered payments, and expenses reasonably necessary for making an income).

6. An event is determined to be an unforeseeable event in IRS published guidance.

Note that the general regulations say that the reason for the move must be due to the fact that the home has become unsuitable or unaffordable as a primary result of a change in circumstances.  Your own statement indicates that you can afford the home, and it has not suddenly become unsuitable, other than the fact that the commute is just enough longer than before to bother you, but not long enough to qualify for the 50 mile safe harbor.  

https://www.law.cornell.edu/cfr/text/26/1.121-3

But, the reasons there are safe harbors is to make it easier for taxpayers to comply with the law, and if you were eligible for unemployment compensation, that is one of the safe harbors.  It doesn't say you must apply or receive benefits, just that you are eligible (i.e. laid off through no fault of your own and not fired for cause, for example.).  See §(e)(2)(iii)(B) in the linked regulations. 

If you want a more definitive statement, you will need to hire your own accountant, who will help defend you in the event you are audited.  Also remember that less than 1% of taxpayers are audited, although we don't know all the triggers. 

[MarilynG1]

One thing to consider is the wording 'Partial Exclusion'.   If you have a gain on your home sale of 250K, for example,  and 150K is excluded (partial exclusion), you'll still have a taxable gain of 100K.  

Since you're so close to having a Full Exclusion of Gain (August 2024), you might consider hanging in until then.

Because you've lived in your house about 18 months, estimate that 66% of your gain could be excluded.  

Don't be afraid of Capital Gains, though, if you are really intent on selling now.   Depending on your tax bracket, your Capital Gains can be anywhere from 0% to 20%

Here's more info on Home Sale Partial Exclusion. 

@dseilkop 

[Opus 17]

@MarilynG1 

I think the concern is that if the taxpayer claims a partial exclusion and is denied, they will pay additional capital gains tax on around $200,000 of excluded gains (depending on exactly when they close, of course).  If they wait,  they may only save a small amount of tax, but they gain financial certainty.  For my opinion on the safe harbors, see above.