Q:

Subject: Primary Residence Sales: Partial Exclusion

Can I move without paying capital gains taxes?

It's been 12 long months of putting up with my house and I’m sick and tired of living in my current home. Moving would relieve my stress and improve my health, but I couldn't afford to move if I had to pay capital gains taxes.

You state in your website that a pro-rated exclusion is available "if the move was made due to health, work, or other unforeseen circumstances. Health reasons can cover a multitude of situations, including just being sick of living there."

However, the IRS issued a precautionary note: A sale "that is merely beneficial to the general health or well-being of an individual is not a sale ... by reason of health." Further, the IRS regulations stipulate that a preference for a different residence or an improvement in financial condition would not qualify.

What can I do?  Thank you for helping.

A:

You are correct that the health reason needs to be more specific than just feeling better to qualify for the pro-rated tax free exclusion.

However, if you think hard and creatively enough, it shouldn't be very difficult to come up with an actual health reason.  Factors such as allergies (to things on your property or from the neighbors) and access  (inability to handle stairs) occur very often. 

Safety issues, such as new dangers in the neighborhood with speeding cars or homicidal neighbors, would be examples of justifiable health matters. 

You just need to be able to prove, in the unlikely case that IRS even asks about it, that the situation either changed after you moved in, or you were unaware of it before starting to reside there.  As with all tax matters, the burden of proving the case lies with you and not with IRS. 

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/11/2005 07:46:00 PM Send this post: