Q-1:

Subject: Question on sale of primary residence owned less than 2 years

We are possibly in a situation where we may sell our primary residence that was purchased Jan. 6th, 2005.  My wife (who was only applicant on the mortgage) is pregnant and has been forced to bed rest for a short period of time.  She is a physician although not necessarily the primary wage earner, but due to bed rest is unable to 'moonlight' which drops here gross monthly income by roughly $4500 per month.

 

Is this a qualifying circumstance to get a prorated discount on tax on sale?  We purchased the home for $540,000 and are looking to sell for between $750k and $825k.

 

Thank you in advance for your assistance.

 

Sincerely,

A-1:

While it may be possible to justify the use of the prorated exclusion based on your description, I would feel nervous about your use of the term "short period of time" for the disruption in your wife's income flow.  That would be a harder case to make than a long term reduction in her income due to the need to take off from work for the pregnancy and the post natal time to raise the baby.  IRS could say that a short-term interruption in income could be dealt with without having to actually sell the home, while a longer term reduction would be a valid reason to sell.

You'll need to go over your facts and circumstances with your personal professional tax advisor to see if s/he will feel comfortable with claiming the prorated exclusion.  If you do decide to claim it, attaching an explanation of the facts to your 1040 will make it slide though with less opposition from IRS.

Good luck.  I hope this helps.

Kerry Kerstetter

Q-2:

Thanks for the advice....By the way what is the tax rate on a sale of property owned from 12-24 months?

A-2:

That would be taxed as a long term capital gain, which is a nominal rate of 15% for the Federal.  The actual effective rate will be much higher due to the penalties applied to people with high AGI.

I have the 2006 Federal rates on my website.

State rates differ.

Kerry

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/29/2006 11:15:00 AM Send this post: