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

Create A Diary of Your Final Wishes – Gail Buckner covers the need for good planning for the end, including some more discussions with Mark Colgan about his excellent and highly recommended Survivor Assistance Handbook, which has been included in my blogroll on the right side of this page for a long time now.  

My earlier comments and experiences with the current IRS project (which is what they are calling it) to audit refund claims dealt with individual returns (1040X).  I wasn’t aware whether or not the project also included corporations, which raised a dilemma for us a few months ago when a client wanted to carry a corporate net operating loss (NOL) back to recover some previously paid tax. Such a carryback should be a straight forward calculation, with nothing for IRS to need to examine in excruciating detail.  However, because of the current uncertainty, we opted to hold off the carryback and roll the loss forward instead. 

The other day I was speaking with an IRS auditor who is examining some 1040Xs I  had prepared and was among those who had told me of the IRS’s current policy of auditing all amended returns claiming refunds.  When I told him that we had held off carrying back an 1120 NOL because of this situation, he said that was a wise move because they are also examining those. 

As I said earlier, I wasn’t aware if the current IRS attack on amended returns included 1120s.  Now I know and am glad that we held off doing one for my corp client. 

While an NOL carryback or over sort of works its way out and is more of a timing issue as to the tax savings, with the other kinds of things that create most amended returns, such as overlooked deductions, not being able to claim them on an amended return means they are lost forever.  It’s a classic use it or lose it situation.

I wasn’t given any idea of how long this current IRS project will continue.  However, I was given a heads up on their next project, extensive audits of pass-through entities, such as partnerships, S corps, LLCs, and trusts, which will also trace each item to the owners’ tax returns.  While checking the owners’ tax returns, auditors will also almost definitely fish around for other things to mess with. 

Social Security: Defending the cap – One of my long running predictions on how our rulers will try to keep the Social Security system anywhere close to solvent is the removal of the cap on income subject to the tax, while at the same time denying benefits to those same people.  Those “evil rich” people have long been high profile targets for the leftys who love to exploit class warfare and others’ envy of the wealthy to garner support from their base.

Grading the Social Security debate – Good look by Alan Reynold at many of the bogus issues being discussed in this debate, including AARP’s extremely dishonest propaganda campaign to equate private control of retirement accounts with outright gambling.

The Net Is Modernizing Home Buying and Selling – How I wish we would have had the current access to real estate info via the internet 13 years ago, when we were scoping out places to relocate to in our escape from the PRC. 

The Social Security crisis begins in just 5 years – From Donald Luskin.  I’ve considered the system to be in crisis for decades already, considering the hundreds of thousands of dollars people have been forced to pay into the Ponzi Scheme.

Daunting tax-reform task – Bruce Bartlett is also not too optimistic about the the tax reform panel’s chances of actually accomplishing anything worthwhile.  As I said earlier, without the input of at least a few real world tax practitioners, the entire exercise seems futile.  They don’t have to remove any of the current members.  Just add someone from one of the big CPA firms who can address tax issues facing large clients and a small firm CPA or EA who can convey how things are for smaller clients.

Emulating their spokesman Dan Rather’s approach to dealing with reality, the DemonRats think they can continue to control all of our money by denying that there are any problems with Social Security and continuing with their arrogant attitude that people are just too stupid to see the truth for themselves.