Q:

Subject: Primary Residence Tax Exemption

I have a question regarding the tax exemption on the sale of a primary residence.

I called the IRS and based on what they told me it didn't sound like I would not qualify.

I am in the military and relocated to Yuma in February 2004. 

I did a build contract on a house in December of 2003 prior to moving to Yuma, AZ.

The house was not completed until August 15 2004.

- The house is a 4 bedroom 2 bath 1768 sq ft.

-  At the time that I purchased the house in December of 2003 it was only my girl friend, domestic partner of 4 years, and myself.  We both have 2 children each from a prior marriage.  I have a son 14 and a daughter 11 and she has a son 12 and a daughter 8.  We had only anticipated having our children during visitations.  Since moving to Yuma 3 of them have come to live with us full time and still a possibility of the 4th coming too as there is a custody hearing pending.

-  We want to buy a bigger house 5 bedroom 2 bath 2200 sq ft to better accommodate everyone.  The 4 bedroom is workable, but it is a small 4 bedroom and very cramped for 6 people.  There has been about $90,000 in equity increase in my current house, the new house I would like to upgrade to will cost $235,000 I will be using all of the equity from the sale of our current house towards the new house and is a big consideration prior to entering a contract that I might get stuck paying money out of pocket to cover the 15% in taxes on the capital gains of my current house.

Is there any more information out there to clarify whether or not I would qualify for an exemption under 2 years?  By the time the new house would be completed I will have lived in my current house about 16 months.

Thank you for your time,

A:

Your use of a double negative regarding what the IRS told you has me confused.  However, it really doesn't matter in the least since it is a well documented fact that over half the time anyone calls IRS, they are given completely wrong answers.

As you should know, the burden of proof in any tax matter lies with you.

This means that, in the highly unlikely chance that an IRS agent were to challenge you, if you feel confident that you could defend your position that when you moved into your current home, you had no idea that there was a likelihood of your needing to house six people on a full-time basis, and that this requirement came as a complete surprise to you, you would qualify for the pro-rated tax free exclusion of the gain on your home sale.

Assuming the house is just in your name, you would qualify for $342.46 ($250,000 / 730 days) of tax free profit for each day that you owned and occupied the home.  You cannot count the time before you actually moved into the home.  Working backwards from your guesstimate of a $90,000 gain, you would need to have lived in the home for at least 263 days to exclude all of it.  From your description, this sounds like it will be no problem.

What you do with the sales proceeds, as well as how much you spend on a new home, are completely irrelevant.  What is helpful for your case is the fact that you are buying a much larger house based on square footage and number of bedrooms.  This would go a long ways in supporting your contention that you were essentially forced to sell the old home prior to two years because of the unexpectedly larger family size.  It would be a much different story if you were buying a new home of the same size as your old one. 

So, the more I think about this set of facts, the more confident I feel that you do qualify for the pro-rated exclusion.

I hope this helps.  Your personal tax advisor should be able to work out more specifics for your case.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/23/2005 05:58:00 PM Send this post: