Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

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Archive for October 18th, 2006

First & only date?

Posted by taxguru on October 18, 2006

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Repurchasing Residence?

Posted by taxguru on October 18, 2006

 

Q:

Subject: tax exclusion
 
Dear Sir;
 
I am retiring in the Spring and will be moving my legal residence from a condo in Alexandria to our summer home in Michigan.  If I sell the condo I can exercise the $250K cap gains exclusion to cover the $200K cap gains which I expect when I sell the condo.  However I would like to keep the condo, because our children and their families live in the DC area and use it for a winter home.  Can I claim the exclusion if  sell the house to an obliging entity and repurchase it after a week or so (for the same price)??  I realize that I may incur expenses such as transfer fees, etc.  The advantage to me is that after a few years I may sell the condo and move  into a seniors complex.
 
Thank you for your help,

 
A:

 I am not aware of any restriction on repurchasing a residence on which you had claimed the exclusion.  However, doing so as quickly as you intend may open you up for some problems with IRS.  An ironic aspect to the tax laws in this country is the fact that while many of them are clearly intended to motivate behavior, if IRS suspects that the only reason you do something is for the tax benefits, they have the power to nullify it. 

How long to wait before repurchasing the home and avoid IRS accusations of tax motivated behavior is a judgment call that you should discuss with your own personal professional tax advisor.  As background info, a similar situation is with what are called “wash sales” where stocks are sold at a loss and then repurchased.  The tax code has a specific time frame of 30 days before and after the loss sale in which a reacquisition nullifies the ability to deduct the loss. 

The home sale isn’t to trigger deductible losses but is obviously being done so you can start the two year clock for the sale of your new home since only one tax free exclusion can be claimed within a two year period.  Whether an aggressive IRS auditor would try to toss out the tax free exclusion on the first home sale is impossible to predict; but is going to be harder to defend, the less time there is between sale and repurchase.

If the two year clock angle isn’t your motivation for wanting to sell and repurchase the home, you should discuss with your tax advisor holding onto the Alexandria condo and selling it within three years of your moving out.

As additional info to consider, besides the transfer and other related closing costs on the sale and repurchase, you are likely to trigger a reassessment in the home’s property tax valuation, bumping those up.

I obviously don’t have enough info to be able to definitively say whether your plan makes sense or not; but your personal tax advisor should be able to better help you with that thought process.

Good luck.

Kerry Kerstetter

 
Follow-Up:

 Kerry,

Thank you very much for you prompt answer to my question, and since sale/repurchase is not clearly restricted I will pursue it further. As you well know, I must, by law, move my residency to Michigan when I live there most of the year, as will be the case after full retirement..  I have already been investigated by Michigan IRS about not paying MI Income tax and found to be in compliance, since I could show I had worked and lived in VA for more than half of each year.  This was triggered by two addresses and my wife’s residence which is MI, where she lives for 8 month of the year, votes, banks and pays income tax.

The “two year clock angle” is not my motivation.  We will probably keep our home on Lake Superior until we have one foot, maybe both, in the grave. So your suggestion about selling the Alexandria home in three years is an interesting angle, thanks.  However we will probably like to winter in Alexandria area for some time, since both our children (with families) live in the DC area and our son uses the condo often since it is 5 miles from his work whereas his home is 40 miles from work.

Thank you very much for your response,

 

 

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Clients expect a lot from us.

Posted by taxguru on October 18, 2006

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Posted by taxguru on October 18, 2006

Using Retirement Money Now On a Vacation Home Can Pay Off

 

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Tax Cuts Are Effective

Posted by taxguru on October 18, 2006

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1031 Carryover Calculations

Posted by taxguru on October 18, 2006

 

Q:

Subject: Exchange Question

How do I determine the basis of the new property with consideration of both properties being mortgaged?  (Increase in net or decrease in net)

 Is there a gain realized if the property’s FMV I am receiving is less than that of the property I disposed of?

 Thanks,

A:

When you prepare the 8824 to report the exchange to IRS, it will end up with the basis of the new replacement property.  The 8824 is a complicated and convoluted schedule; so most tax prep software programs have worksheets to assist in putting the right figures in the right place, including the amounts of debt on both the original and replacement properties. 

Some other programs also have handy 1031 worksheets, such as the TaxTools program from CFS.  There are links to both the 8824 and a separate worksheet here.

Depending on the amount of exchange expenses incurred in the deal, it possible that trading down may or may not result in a currently taxable gain on the exchange. The 8824 and worksheets will give that result.

Kerry Kerstetter

 

 

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Do liberals learn from their mistakes?

Posted by taxguru on October 18, 2006


(Click on image for full size)

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