Capital Gains Tax
I have a few questions on capital gains tax... I have owned and lived in a property for 1 yr., 11 months...I am having to sell due to unforseen circumstances. We will close escrow approx. 20 days prior to the 2 year mark (the cutoff to avoid paying capital gains tax on a primary residence). There is an IRS form that I need to turn in to the escrow office that asks if I have held this property as a primary residence for at least 2 of the past 5 years (which I have, less 20 days)... do I need to answer no and face the tax implications, or is there any relief for being this close to the cutoff?
Also, if I wind up having to pay the cg tax- will I get any kind of a break because of how close I am to the full 2 years? Any help would be greatly appreciated.
I'm not a tax advisor, but I have heard of the IRS giving special exception to unforeseen circumstances, of course it must be valid and something you can prove, loss of job, relocation because of job, death.. whatever...
Why didn't you set the closing date for 2 yrs and 1 day? Were you unaware of the timeline and just now ralized or what...
IRS doesn't give "exceptions" or "favors" to investors because they missed the deadline by a few days... you'll have to prove your case, which may lead to a greater chance of being audited...
good luck with this..
MT
[addsig]
There are some hardship exceptions to the two year rule. If your circumstances qualify for one of these exceptions, then you can take a prorated capital gains exclusion for the time you actually owned and occupied the property as your primary residence.
I believe that it is prorated. You will only pay tax on 20 days worth of appreciation.
I would definately try extending that escrow closing 20 more days! Write a supplement to the contract extending it if you possibly ****Must Reach Senior Investor status before posting URL's*** assuming this is your principle residence as the 2 out of last 5 year rule applies to primary residence only.
Thanks so much for your replies, this helps. We are trying to extend the escrow period by the 20 days, but it was not written in to the agreement. I'll keep my fingers crossed! My unforseen circumstance does not qualify under the IRS exemptions- the person I purchased the home with decided to go to law school in a different state and I can't afford to make the mortgage payments alone. I hope that the tax will be prorated if we are unable to extend escrow. Thanks again!
It doesn't sound like a qualifying circumstance to me...
You'll be stuck paying taxes on the whole gain, unless you can extend to closing date. Good luck!
I belive everyone is misinformed. I'm not going to go a lot into detail of explaining where this all came from except that it is all available.
We all know that if you live in your primary residence for the past 2 out of the 5 years single people can exclude $250,000 (married $500,000) of capital gaines taxes.
A. Definition of living in the home does not necessarily mean you are living there all the time. The code allows for temporary absenses. Temporary absenses is defined as anything less than 1 year.
B. IRS expended on the code to give everyone further instructions (Dec 2002). If you live in your house for less than two years and you have to move due to "unforseen circumstances" then you can prorate the gain. Lets say that you lived in your house for 1 year or 1/2 the 2 year mark, you are allowed 1/2 the limit above ($125,000 for single, $250,000 for married).
This does NOT mean that if your gain was $60,000 that you have to pay taxes on 1/2.
Now, what is an unforseen circumstance? Here is a list:
1. Multiple births from the same pregnancy
2. diability
3. change in employment
4. change in self employment
#4 is the key! This doesnt mean that anything drastic happened. Maybe you made more money, made less money, changed the name of your company, or started a small business.
How easy is that?
You can listen to Garrett Sutton, attorney, interviewing Diane Kennedy, CPA, both members of Robert Kiyosaki's rich dad's advisors series.
She talks about what I just mentioned in much more detail:
http://boss.streamos.com/wmedia/wsradio/successdna/092203/segment1.asx
Good luck! I think i'm going to put this in an article.
Myfrogger: Thanks for the info,but I would really prefer that you not use my question/situation in an article. I was just trying to get some information.
Quote:
To compute the exclusion, divide the number of days you've lived there by 730 (# of days in two years). So you're 20 days short. That means you've lived there, roughly 710 days? That means you can exclude 97.26% of your gain. That's not bad. Even if your gain is $249,999 (the biggest gain a single person could exclude anyway), you could exclude $243,149, which means your taxable gain would be $6,850. That would mean you pay taxes of $1,028 on a $249,999 gain, not to bad...
Whoa! Help me out here. that's not how I'm reading Sec. 121(c).
According to my reading, the ratio that you calculate merely lowers the cap on your nonrecognition. Meaning, for example, that if the cap gain were $100k, on my reading of the law you could exclude the whole $100k, while on your reading the exclusion would be $97,260, leaving $2,240 exposed to capital gains tax.
Still not a huge tax bite, but if one assumes a $486,300 gain, there would be $13,324 exposed to tax in your example versus zero in mine. And that would be potentially $4k of tax. But on that much gain, again, who cares.
http://www4.law.cornell.edu/uscode/26/121.html
Any tax mavens want to help us out here?
Quote:Now, what is an unforseen circumstance? Here is a list:
1. Multiple births from the same pregnancy
2. diability
3. change in employment
4. change in self employment
#4 is the key! This doesnt mean that anything drastic happened. Maybe you made more money, made less money, changed the name of your company, or started a small business.
The way I see it written is thusly: "Change in employment or self-employment that results in the taxpayer being unable to pay housing costs and reasonable basic living expenses for the taxpayer's household."
My reading would be, you'd better not trade up, and you'd better be making less money at some definable point before (or within a relatively short time after) the sale. And the reduction better be enough to force a move.
Otherwise, no exlusion.
I have been on the sidelines for much of the discussion regarding jaimep's situation.
Many of you are saying that if a proration is allowed, the gain would be prorated. This is wrong. It is the exclusion that is prorated. Potentially, all of the capital gain on the sale could be excluded if the gain is less than the prorated exclusion. Yes, I know that Diane Kennedy used the word "gain" in the context of this discussion, but Diane Kennedy misspoke. Believe me, she really meant that the allowable exclusion is prorated.
Secondly, many of you are hanging your arguments on the "change in self employment:" circumstance. Nowhere in jaimep's account of the problem forcing the sale, can I see that any change in employment is involved.
His/her roommate decided to move out which put a strain on jaimep's finances. In my humble opinion, this does not meet the hardship criteria that permits a prorated exclusion.
My advice to jaimep, at this point, is to offer an amendment to the sale contract to extend the settlement date for three weeks. If the buyer balks, offer some additional seller concession to obain the extension. It might be worth it in tax savings.