Q:

Subject: Primary Residence Questions

My husband and I where recently gifted a home valued at $700K.  I just learned that unless I create a permanent residency status, I would have to pay a huge tax burden upon the sale of the home.

I do understand that if I where a primary resident in the home together we can take a $500 credit and taxes would occur on everything over $500K

My question is can I live in a secondary rental, and still create a primary residence on this home.

MY documentation is needed to constitute a permanent residence.

I still want my mail to come to my secondary rental.

A:

While I do have an explanation of the rules for residence sales on my website, this is the kind of thing you really need to discuss in detail with your own personal tax professional.

There are a number of issues that you will need to discuss with your personal tax advisor, including the following.

Cost Basis - When you receive a gift, your cost basis in the item is the same as it was for the person who gave it to you (donor).  This should be documented on the Gift Tax Return (Form 709) that the donor filed with IRS.  You should get that figure because that will be crucial in calculating your potential gain when you sell the home.

In regard to qualifying for a full $500,000 of tax free profit, you and your husband will need to live in it as your sole primary residence for at least 24 months out of the 60 months before you sell it.  It cannot be a part-time residence or one of two primary residences.  One primary residence per person is all IRS will recognize as legitimate.

As with all tax matters, the burden of proving that you actually did use the home as your primary residence rests with you.  In the rare case that IRS questions your right to use the Section 121 exclusion, you will need to be able to provide an adequate amount  of documentation of this fact.  Such documentation can include such things as your voter registration, residential property tax exemptions (if applicable in your area), as well as use of that address for your normal mail.   Since any such IRS challenge wouldn't happen until a year or two after you have reported the sale on your 1040, you should hold onto the documentation until the coast is clear for any IRS challenges (generally three years after filing your 1040).

Your personal tax pro can give you more customized advice for your situation.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/26/2006 06:52:00 PM Send this post: