Selling primary home. lived in it 14 months. New remote job requires higher quality internet . Buying home with better internet. Do I qualify for cap gains exemption?

[tjoreilly22]

We purchased a home in a very rural environment 14 months ago. I have not taken a job that requires frequent travel and higher quality internet. We have purchased a home in a more urban environment with better internet snd closer to airport. Also closer to the HQ in general.

Due to the current market, it looks like we will be selling for a gain. I see there is an exemption for work related move, but I do not see that it applies to remote work. I will not be able to perform the job at my current residence. Will I qualify for the exemption?

[Critter-3]

You may qualify for a partial exclusion.   https://www.irs.gov/pub/irs-pdf/p523.pdf#page=4

[tjoreilly22]

So for instance, if the new home is only 40 miles. From the current home I live in, it wouldn’t count even though the current home doesn’t provide adequate services for the new job? Am I reading that correctly? 

[tjoreilly22]

I actually just looked. It seems this may be considered unforeseen circumstances or employment. Internet has gotten considerably worse since we have been here along with consistent power outages. Just not suitable for remote work. How do you go about applying for this? Do I reach out to the IRS directly or do I just state this when filing my taxes through turbo tax. 

[Critter-3]

It will be part of your return you file next year ... you should get a 1099-S at closing and you MUST report the sale ... follow the screen instructions until you get to the exemptions on form 5329 ...

To report the sale of your home, please follow the instructions below:

In TurboTax, jump directly to the entry screen for sale of a home:

1. Enter sale of home in the TurboTax search box and press the Find key.
2. Select Jump to sale of home at the top of the Top Questions box.
3. On the Sale of Your Main Home screen, select Yes. 
4. On the Sold a Home screen, note the information you'll need to answer and click Continue.
5. Answer the interview questions on the following screens.
   
   

[Opus 17]

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@tjoreilly22 wrote:

I actually just looked. It seems this may be considered unforeseen circumstances or employment. Internet has gotten considerably worse since we have been here along with consistent power outages. Just not suitable for remote work. How do you go about applying for this? Do I reach out to the IRS directly or do I just state this when filing my taxes through turbo tax. 

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Publication 523 lists a few specific "safe harbors" -- situations that will be automatically acceptable for the partial exclusion.  Anything outside of those safe harbors might qualify, but would be open to interpretation by the auditor if you were audited.  Here is the IRS regulation in question,

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

Change of employment is specifically limited to change in place of employment.  Other unforeseen circumstances might cover a change in residence due to a change in employment requirements not related to place of employment, but you would have to make a convincing case to the auditor if you are unlucky enough to be audited.  Be aware that the partial exclusion does not apply "if the primary reason for the sale or exchange is a preference for a different residence or an improvement in financial circumstances."  And an auditor could say that you could have solved your problem with a generator and a Starlink subscription which, while costing more than cable internet, were still available to you, making the move a preference.  I'm not saying this, I'm just suggesting it as a possible interpretation. 

On your tax return, you will simply claim the unforeseen circumstance partial exclusion.  Don't send proof with your return, but keep proof for at least 6 years if audited.  

[Mike9241]

reduced exclusion may be available since the primary reason seems to be a change in place of employment. there is a safe harbor, meaning you qualify and the IRS can not challenge it, if: 1) the change occurred during the period you owned and used the property as your main home and 2) the new place of employment is at least 50 miles farther from the old residence than the former place of employment was.

then there are unforeseen circumstances - this is at the discretion of the IRS - many times taxpayers will obtain a private letter ruling 

finally there is fact and circumstances - not a safe harbor. factors that may be relevant in determining the primary reason for the sale include the following reg 1.21-3(b)

(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.

[maugs16]

Hello Opus17. Have you found any IRS guidance or have an opinion regarding a definition of "place of employment" under c(1) and (2)?

Pandemic example: Client works for a California company and lives in CA. Pandemic happens and company implements a remote work situation. Client then sells his house which he has owned for less than 2 years and moves to Texas. 

Let's assume too that the "primary reason for the sale or exchange..." from CA to TX  "...is a preference for a different residence or an improvement in financial circumstances." He wants to wear a cowboy hat 24/7

My question: Would the safe harbor still apply allowing for the partial exclusion under c(2)(ii)?

Hasn't the Client moved to a new place of employment? Because the company now has an employee working in Texas, the Company will have nexus in Texas and will be subject to sales tax/franchise tax/worker's comp, etc. specifically for their TX employee. By moving to TX, hasn't the Client therefore created a de facto "Texas Office" of his Company?
 

And if that's the case, wouldn't his "new place of employment..." be "at least 50 miles farther from the residence sold or exchanged than was the former place of employment" under section c(2)(ii), thereby meeting the safe harbor?

The Client may fail a facts and circumstances test/unforeseen circumstances test under e(1), but because they meet the safe harbor (assuming a new place of employment exists), wouldn't the partial exclusion still be allowed?

Thank you for any help you may provide!

[TomD8]

@maugs16 wrote:  "Because the company now has an employee working in Texas, the Company will have nexus in Texas and will be subject to sales tax/franchise tax/worker's comp, etc. specifically for their TX employee."

You might want to review Texas's definition of "nexus" in this web reference:

https://www.grantthornton.com/library/alerts/tax/2020/SALT/P-T/TX-amends-franchise-tax-nexus-regulat...

[maugs16]

Thank you, TomD8.

Let's assume that the CA company in the example above has little to no sales to TX so that economic nexus doesn't come into play. Assume we're just looking at physical nexus due to an employees' move to the new state (and that the employer is ok with the employee triggering physical nexus).

I am less worried about nexus issues for the company than I am about trying to determine what defines a "place of employment" for the employee. Unless, am I missing your point? I want to make sure I'm not missing something...

Thanks again

[Opus 17]

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@maugs16 wrote:

Hello Opus17. Have you found any IRS guidance or have an opinion regarding a definition of "place of employment" under c(1) and (2)?

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I don't believe this has been ruled on formally.  However, in the example where a business office closes and directs their employees to work remotely (i.e. from home), and the employee already has a home, then selling and buying a new home would almost always be personal preference and not eligible for the partial exclusion.  I suppose we can invent edge cases, such as the employee is an IT professional and has certain requirements for electrical power and high speed internet and their former home can't be upgraded; or a fashion designer who needs room for a studio.  But I think for the general case where the company says "work from home" and the taxpayer already has a home, there has to be some additional reasons why working from the prior home would have caused financial hardships that were both significant and unforeseeable, before selling and buying a new home would meet the conditions for a partial exclusion.

Remember that the move-related safe harbor says this:

You meet the requirements for a partial exclusion if any of the following events occurred during your time of ownership and residence in the home.

• 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. For example, your old work location was 15 miles from the home and your new work location is 65 miles from the home.

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

• Either of the above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.

Your example fails test 1 because, even if the company says, "the office is closed, you must work from home" and that is interpreted as a transfer of your work location, your new work location is not 50 miles farther away from your home than the old location, because your new location is your home.  Your subsequent move is not by the company's direction but your own choice.  You fail test 2 because, even if your "new job" is taken to be the new home in Texas, you did have a previous work location.

If you fail the safe harbor test, then you would have to meet the "other facts and circumstances" test which says 

Even if your situation doesn’t match any of the standard requirements described above, you still may qualify for an exception. You may qualify if you can demonstrate the primary reason for sale, based on facts and circumstances, is work related, health related, or unforeseeable. Important factors are:

• The situation causing the sale arose during the time you owned and used your property as your residence.

• You sold your home not long after the situation arose.

• You couldn’t have reasonably anticipated the situation when you bought the home.

• You began to experience significant financial difficulty maintaining the home.

• The home became significantly less suitable as a main home for you and your family for a specific reason.

The question now arises, what financial hardships did you experience working from home in CA that are alleviated in TX?  Did you really sell your prior home primarily because your work circumstances changed?

[Opus 17]

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@maugs16 wrote:

Thank you, TomD8.

Let's assume that the CA company in the example above has little to no sales to TX so that economic nexus doesn't come into play. Assume we're just looking at physical nexus due to an employees' move to the new state (and that the employer is ok with the employee triggering physical nexus).

I am less worried about nexus issues for the company than I am about trying to determine what defines a "place of employment" for the employee. Unless, am I missing your point? I want to make sure I'm not missing something...

Thanks again

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If you want to further explore this, here is the Federal Register explaining the new regulations when they took effect in 2003.  I don't think telework was in their minds at the time.

https://www.govinfo.gov/content/pkg/FR-2002-12-24/pdf/02-32280.pdf

Importantly, consider this,

This reduced maximum exclusion applies only if the sale or exchange is by reason of a change in place of employment, health, or unforeseen circumstances. A sale or exchange is by reason of a change in place of employment, health, or unforeseen circumstances only if the taxpayer’s primary reason for the sale or exchange is a change in place of employment, health, or unforeseen circumstances. The taxpayer’s primary reason for the sale or exchange is determined based on the facts and circumstances. The temporary regulations provide a list of factors that may be relevant in determining the taxpayer’s primary reason. These factors are suggestive only. No single fact or particular combination of facts is determinative of the taxpayer’s entitlement to the reduced maximum exclusion.

If you claim the exclusion under the facts and circumstances you have outlined, and are audited, you will have the burden of proof to show the primary reason you moved was due to your working circumstances. 

[Opus 17]

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@TomD8 wrote:

@maugs16 wrote:  "Because the company now has an employee working in Texas, the Company will have nexus in Texas and will be subject to sales tax/franchise tax/worker's comp, etc. specifically for their TX employee."

You might want to review Texas's definition of "nexus" in this web reference:

https://www.grantthornton.com/library/alerts/tax/2020/SALT/P-T/TX-amends-franchise-tax-nexus-regulat...

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Nexus doesn't have anything to do with it.  The question is, what is your workplace, and was your primary reason for moving a change in workplace?  I don't think there is an issue that your new home in TX becomes your workplace, the question is will be, was your change in job situations the primary reason for your move?