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

Forum|Forum|4 years ago
January 19, 2022
2 replies
0 views

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?

TurboTax Deluxe Online

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.

kayla9800Author

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

Employee

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.)

kayla9800Author

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

Employee

@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.