Tax Guru – Ker$tetter Letter

IRS Is Ahead of the Game

I normally consider myself to be on the cutting edge when it comes to twisting the tax laws & regulations in strange & unintended ways. I have developed scores of creative interpretations of the tax rules. Most of the time, IRS never has a problem with them. Occasionally, IRS or Congress changes the law to shut the door. This usually takes a few years for IRS to catch up with us.

In what may or may not be a trend, IRS has closed a loophole even before it could be used. As this article from the L. A. Times indicates, people who were planning to use the new (for 2001) provision to report make-believe (aka deemed) sales of appreciated primary residences are out of luck.

However, this has started the wheels turning in my mind. IRS has ruled that the tax free exclusion may not be used for a pretend (deemed) sale of a home. What if a home is sold for real for $500,000 above its costs basis, this is treated as a tax free sale, the home is repurchased for the same amount as it was sold for (causing no taxable gain for the temporary owner), and then it is sold (for real) two years later for $500,000 higher than the last sales price? Conceivably, this could happen every two years.

A word of caution: contrary to popular belief, the burden of proof in tax matters still rests with the taxpayers. If you are considering such a creative and/or aggressive interpretation of the tax law, you should definitely work with a like-minded tax advisor to prepare things to survive any IRS challenge.

My short description of the current residence sale rules can still be found here.

KMK