Q:

Subject: Please help with some tax questions...

Hi Kerry,
I just read your articles on tax exemption for the sales of a primary residence.  I purchased my current home (only property that I own or have owned) about a year ago in California.  I’m looking to move shortly since I’m getting married and will have a 3-year old living with me (actually they both currently live with me).   Our current neighborhood, though sufficient for my own purposes, is not exactly what I’d call child friendly.  We do not feel safe, as a family should.  We also work excessively far from our home, over 50 miles each way.

I would like to move from this location approximately 20 miles westward (towards the coast).  Is there a way that I can get an exception on the gain from the sale of this house?  I expect to see a gain of approximately $70,000-$100,000 (did quite a few upgrades in the past year).  Reading through your summarized pages, I don’t seem to qualify for any of the posted exclusions.  As it is, I can’t afford to move without extracting maximum gain from my current house and with trends in the market, I will be shut out from any possibility by next summer.

If you find some free time, I would truly appreciate any and all advice that you can give.  My realtor knows little (very sweet woman, but not the sharpest tool in the shed), and even those at H&R Block seem to be caught in a time warp.  Some professional information would be greatly appreciated.

Thanks in advance,

A:

I don't see a problem here.  Either getting married or having a child move in are the kind of life changing unforeseen circumstances that would make you eligible to use the prorated exclusion of gain.  After being there a year, this means that you could exclude at least $125,000 or profit; more than enough to cover your situation.

Good luck.

Kerry Kerstetter

Follow-Up:

Hi Kerry,

This is great news.  How do I petition or write a letter to in order to get my exemption?  Obviously, in California, I will have to petition both the IRC and the California Franchise tax board, but I don't want to start sending out blanket letters to either of those two agencies.  The progress and resolution of the exemption will take years.  Do you happen to have an address and contact department who I should send my information and claim to?

Thanks in advance.  Your site as well as your personal assistance has been a HUGE relief.  Being in a state that promotes family values and wellness, you would think they would make it easy to better your situation, but that is not the case.  Real estate agents are virtually worthless and getting help directly from the IRS is nothing more than a game of cat and mouse.

Thanks again.  I'll send you pictures of my new house once this is all said and done.

Regards,

A:

That is not how this works.  You don't need to get anyone's permission ahead of time when claiming the tax free exclusion for residence sales.

If you feel that you qualify for an exclusion, you just report the sale and the amount of gain excluded under Section 121 on Schedule D with your 1040.  If you are claiming the pro-rated exclusion for special circumstances, it is a wise move to attach an explanation of what those circumstances were. 

As with anything on your 1040, IRS will have three years to decide if they will accept your exclusion or ask you for more details.  My philosophy has always been to attach more than enough documentation of your case so IRS will have no need to request anything more from you.  This has never failed to head off IRS challenges of the several tax returns I have prepared with similar circumstances.  It is also one of the main reasons I advise against using IRS's electronic filing system because that does not allow any additional explanations of unusual items.

This is a very basic part of the tax law, which makes me nervous for your ability to do things properly.  You should work with a tax pro or you are very likely to screw things up.  Obtaining tax advice from IRS or Realtors is absolutely nuts.  Stick with CPAs and Enrolled Agents who believe in the philosophy of helping their clients save money as I discuss on my website.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/18/2005 02:11:00 PM Send this post: