Publication 523: Am I qualify for partial exclusion under Other Facts and Circumstances because of long commute time(~4 hours round trip)

[frank790628]

I will not meet the 2 years out of 5 years rule in this July. Also, my new office is not 50 miles farer than my old office. I am not meeting the standard requirements. However, Other Facts and Circumstances in Publication 523 says that I might still be qualify for partial exclusion for work related move. I was moving because I cannot get used to doing 4 hours commute post pandemic. It was a work related move.

My detail timeline is like below:

2015 July: Employed at company A
2018 May: Purchased my home

2018 July: Quit my job at company A (17 miles away from my home)

2019 Feb: Got a new job at company B (51 miles away from my home)

2021 Jul: Moved our from my home because the commuting would take ~4 hours a day. And I rented out my place

2024 July: I am planning to sell the property. 

[Opus 17]

Are you sure you don't meet the 2/5 rule?  I guess it depends on when you moved out.  If you moved out on July 1, 2021 (started your new lease) but you don't close on the sale until after July 2, 2025, then you missed the 3 year requirement, but just barely.  Can you push the sale up to June, so you close less than 3 years after moving out?  (Because of the tax savings you would see if you sell in June, you may be able to offer a significant price discount or other financial incentives for a fast close.)

If not, you can't use the partial exclusion.  The partial exclusion applies if you need to sell the home before meeting the 2 year ownership requirement.  There must be a triggering event that forces you to sell due to a financial, medical, or other hardship, and the sale must be close in time to the triggering event.  The partial exclusion does not apply to extend the requirement that you sell within 3 years of moving out.  And, you don't have a triggering event in 2024.  You can claim the exclusion if you sell in June 2025, but if you wait to July, either due to market requirements, bad planning, or just bad luck, you can't use the exclusion. 

[TomD8]

If you claim a partial exclusion, no one here can tell you with certainty whether or not your claim will stand up to an IRS audit. I suspect that your problem if audited would be that you knew your new job was 51 miles from home when you took it in 2019. An auditor might well conclude that your 4-hour total commuting time was reasonably foreseeable. And one of the "important factors" listed in the "Other Facts and Circumstances" section of Publication 523 is that you "couldn’t have reasonably anticipated the situation when you bought the home." https://www.irs.gov/pub/irs-pdf/p523.pdf

[Opus 17]

Under section 1.121-3 of the regulations, there must be a change of circumstances which is the proximate reason for the sale.  Factors used to determine if the change in circumstances was the proximate reason include,

(1) The sale or exchange and the circumstances giving rise to the sale or exchange are proximate in time;

(2) The suitability of the property as the taxpayer's principal residence materially changes;

(3) The taxpayer's financial ability to maintain the property is materially impaired;

(4) The taxpayer uses the property as the taxpayer's residence during the period of the taxpayer's ownership of the property;

(5) The circumstances giving rise to the sale or exchange are not reasonably foreseeable when the taxpayer begins using the property as the taxpayer's principal residence; and

(6) The circumstances giving rise to the sale or exchange occur during the period of the taxpayer's ownership and use of the property as the taxpayer's principal residence.

You can't meet tests 1, 2 or 3, because nothing changed in 2024 that made the home unsuitable, or unaffordable, and it was 5 years after the job change.  There is or was nothing stopping you from selling the home before June 2024, and no recent change of circumstances forcing you to sell the home in July 2024.

While it is true that "only the IRS can judge" if you are audited, I don't see a lot of support for a partial exclusion in your scenario.  Can you close the sale in June?