Breaking the Code – Thanks to Andrew Roth at the Club For Growth for the heads up on this NY Times lengthy look at the tax reform efforts.

For most of us in the tax and accounting profession, fighting fires is just an often used metaphor.  However, for those of us in the boonies, it sometimes becomes all too real.  Although I began Saturday evening working on income tax returns, this is how Sherry & I spent the rest of the night.  We got dressed in our turnout gear and left shortly after the 8:30 call, and returned slightly after midnight. 

Sherry has spent most of today (Sunday) on the phone with the Red Cross and others trying to help the Halls recover from losing everything except their lives in that horrendous fire. 

Q:

Subject: sale of primary residence

Help!
I’ve been scouring sources from the Internet looking for a clue on the ramifications of selling my primary residence.  Yours is the first site that I could make heads or tails of. 

This is the situation.  We have owned our home since 12/01/2003.  We began building a new home in a new development in 8/04 (less than 50 miles).  The new house will be ready for occupancy 3/05.  We want to sell our home, but know that we do not meet the “2 year” rule.  We estimate that we will realize about 75k in gain. We do not qualify with change of employ or health.   How do we calculate the taxes? 

Any info will help.

Thanks

A:

There are a number of issues that you need to consider here, hopefully along with a personal tax pro who can more specifically advise you.

First, I would look a little more aggressively and creatively at the employment aspect of your need to move to a new home prior to the full two years in your current one.  While your outside job may not be changing, I have seen cases where a new home was being built or purchased in order to better accommodate a home based business and the pro-rated tax free exclusion was then justified.

If that doesn’t work, you will be facing a long term capital gain.  This means that you want to do a very thorough job of calculating the cost basis of the home you are selling.  Make sure to include every improvement you made to it, along with any appliances and furnishings that you are leaving with the property.  The higher your total cost basis in the home, the lower your taxable gain.

Since you are selling so early in the year, you have plenty of time to offset the gain with capital losses.  You don’t want to intentionally lose money on anything.  However, if you own stocks or other investments that have dropped in value, you can sell them to be able to claim those losses.  If you want to get back into those investments, you will need to wait 31 days before you repurchase them in order to avoid the “Wash Sale Rule” which would disallow the losses.

If you still have a net capital gain after all of that, the Federal income tax will most likely be 15%, although you may have part of it taxed at 5%, depending on the level of your other income.   You will also be looking at State income tax, unless you live in one of the states without an income tax.

I hope I covered your question properly.  As I said up front, these are very general comments.  You really should discuss your strategies with a tax pro who can take into account other aspects of your life that may be helpful for you.

Good luck.

Kerry Kerstetter

 

Q:

Good Evening;
 
I would like to know if this qualifies as a resident. I just signed a Purchase and Sales on my property. I have a parcel of land that was always included as pert of my primary residence. I sold same aprrox 2 mos ago. I would like to know where I have been living here in my home along with the parcel of land as part of my home, would that qualify as 2 yrs in the primary residence which would cover me from paying capital gains on said property?

A:

From the way you described this, as long as both sales take place within two years of each other, you should be able to count them both as the sale of your primary residence, which would qualify for the tax free exclusion.

Check out the section called “Vacant Land” on my page describing residence sales to see if your case matches this:

Good luck.

Kerry Kerstetter