Tricky Tax question on sale of primary residence.

CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes

11y

@Linda Weygant thanks for the mention!

@Jered Sturm I do have key word alerts set up for my name and I appreciate your kind words!

Unfortunately, I take the position that this sale will not qualify for the "unforeseen circumstances" test as the developer buying up the neighborhood improves your financial position. Additionally, "unforeseen circumstances" is the hardest test to qualify for as there is a lot of grey area in the code and rulings (the other two tests are employment and health).

Per Reg. Sec. 1.121-3(e)(1):

In general. A sale or exchange is by reason of unforeseen circumstances if the primary reason for the sale or exchange is the occurrence of an event that the taxpayer could not reasonably have anticipated before purchasing and occupying the residence. A sale or exchange by reason of unforeseen circumstances (other than a sale or exchange deemed to be by reason of unforeseen circumstances under paragraph (e)(2) or (3) of this section) does not qualify for the reduced maximum exclusion if the primary reason for the sale or exchange is a preference for a different residence or an improvement in financial circumstances.

The gains will be subject to capital gains tax instead.

Hope this helps!

Account Closed

Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes

11y

I would try to get a private letter ruling before filing. Might be good to bring in a specialist in addition to your accountant to see what they think as far as cost/benefit for putting the process together.

I think that 3 will be the most difficult to prove because it's not that crazy for someone to want to buy your property. If I were a commissioner I wouldn't even factor that they wanted to buy every house on the block. Was the sale forced or was there eminent domain involved?

Tatyana Shevnina

Specialist · Los Gatos, CA · Member since 2014 · 73 posts · 28 votes

11y

Here's a link to an article with unforeseen circumstance examples -- all involve a clear hardship.

I prepare taxes but haven't had this one come up yet :) Good luck.

Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

11y

Pretty sure a financial windfall isn't going to fall under the unforeseeable exclusion...it is a decision you made voluntarily, for a gain. Be happy paying the cap gains tax on an unexpected profit.

OP

Investor/Syndicator · Cincinnati, OH · Member since 2014 · 470 posts · 599 votes

11y

@Brandon Hall

Thank you for taking the time to look into this for me. Your information is very helpful.

you quoted

"A sale or exchange by reason of unforeseen circumstances (other than a sale or exchange deemed to be by reason of unforeseen circumstances under paragraph (e)(2) or (3) of this section) does not qualify for the reduced maximum exclusion if the primary reason for the sale or exchange is a preference for a different residence or an improvement in financial circumstances."

Although I am going to have a sizable gain on the property that is not the primary reason I am selling my home. If I decided not to sell they would have developed around (between a goodyear tire and a Kroger to be exact) my home making it unstable for a typical home.

One question I can not seem to find the answer to is, what do I need to do if I want to take the partial exclusion. Is this something I have to have approved by the IRS to take or is it something I do and just keep as much documentation to back my case in the event of an audit?

Some of the documentation I can get/have is the following:

- A Freddie mac affidavit that released me from the 1 year owner occupied period. I purchased the home from the home steps program where I agreed to live in the home 1 year. I was legally released from that obligation due to the development happening around me.

-Site plans for the development

-A letter from the development company stating I couldn't have know about the development before purchasing.

@Account ClosedThank you!

OP

Investor/Syndicator · Cincinnati, OH · Member since 2014 · 470 posts · 599 votes

11y

@Wayne Brooks

& @Brandon Hall

You both say the gains will be subject to capital gains tax. Im assuming you are saying this would fall under the short term capital gains tax which is = ordinary income rate.

A follow up question I have for that is does the gain of the home move my tax brackets?

for example If in 2015 my wife and I (filling joint) made 100k at our 9-5 job and made another 100k gain on the sale of the home in 2015 would we taxed at the $100k income bracket or the $200k income bracket?

CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes

11y

@Jered Sturm

To answer your most recent question - it will push your AGI and taxable income up $100k, and therefore you will likely move up brackets.

The partial exclusion is generally based on the number of days you lived in the home as your primary residence divided by 720 days (two years). So your pro-rated percentage of the $500k exclusions (if married filing joint) will be 37.5% ([9x30]/720), or $187,500.

With the new information, I may be swayed to think you'd have a small shot at convincing the IRS your property value would decrease after the development took place. It would be even better if you could get an accurate market estimate on your old neighbor's house for further proof of the declining property values due to the new development.

Tatyana Shevnina

Specialist · Los Gatos, CA · Member since 2014 · 73 posts · 28 votes

11y

My take is that you don't need approval. You'll file with a partial exclusion and keep documentation. Also, yes to short-term capital gain and yes to moving up the tax bracket.

OP

Investor/Syndicator · Cincinnati, OH · Member since 2014 · 470 posts · 599 votes

11y

Wow @Brandon Hall you are the man! If you were in Ohio you would have my business! Thank you for shedding so my light on the subject. Much more than my own CPA was able to.

The only question I still have is:

What do I need to do to take advantage of the partial exclusion? Is it something I have to apply for or do I simply just not claim the gain of the sale and have all the documentation I can get in case of an audit.

Here is where I stand currently:

I know that the event was unforeseen. Just because the unforeseeable event had a positive effect does not make it unforeseeable. @Wayne BrooksIf the fact that there is a gain ("windfall") makes it not eligible for the partial exclusion then whats the point of having the unforeseeable section at all? no one with a loss needs it. My reason for selling is the development. The windfall/gain is just an effect of it. look at it this way. The development could have happened with out me gaining but the gain could not have happened with out the development. Both were unforeseeable. The IRS law has so much grey area that no one truly knows. And if it comes down to taking my chances. I will take my chances because not only do I feel im right I know that my chances of an audit are slim.

I have to say thank you to all of you for helping me out on this process your knowledge is much appreciated!

CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes

11y

Originally posted by @Tatyana Shevnina:

My take is that you don't need approval. You'll file with a partial exclusion and keep documentation. Also, yes to short-term capital gain and yes to moving up the tax bracket.

I too would generally say you don't need prior approval, however if there isn't a statute, regulation, court decision, revenue ruling, revenue procedure or notice that can be utilized to to support the basis, then we are treading in grey areas and should proceed with caution.

@Jered Sturm a Private Letter Ruling (PLR) may be an okay route to take (if the IRS even takes it) but as with anything, it comes with a cost.

Generally, you will not report the sale of your main home on your tax return, unless: you have a gain and do not qualify to exclude all of it; you have a gain and choose not to exclude it; or you received Form 1099-S. If you need to report the gain, you will complete Form 8949.

"If the fact that there is a gain ("windfall") makes it not eligible for the partial exclusion then whats the point of having the unforeseeable section at all?"

"Unforeseeable events" is generally geared toward those who experience economic hardship unexpectedly. this will make your case harder to sell, though not impossible. Just be prepared to fight dirty if you are ever audited.

"If you were in Ohio you would have my business! Thank you for shedding so my light on the subject. Much more than my own CPA was able to."

Technology man! I have clients all over the U.S. The only thing I wouldn't be able to do is shake your hand (though plenty of people prefer a local CPA and there's nothing wrong with that).

http://www.journalofaccountancy.com/issues/2009/no...

Account Closed

Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes

11y

With the explanation your argument is better and but I would still have trouble signing the return. If you do get audited and the tax court disagrees, the penalties could be significant, which you would then come sue me for.

Tough call, but I feel like I would want a determination letter from the IRS before filing to be sure.

This article seems to infer that most determination letters related to this circumstance have been approved and you would want to make your case under the "environmental" category.

Tim G.

Flipper/Rehabber · Miamisburg, OH · Member since 2014 · 161 posts · 64 votes

11y

@Jered Sturm just thinking outside the box here. But anyway to work a deal with the developer for you to hold on to the property for the full year?

Tim B.

Investor · Cottage Grove, OR · Member since 2013 · 12 posts · 4 votes

11y

could you do a 1031 exchange to avoid paying capitol gains now?

Podcast Guest on Show #130

Will BarnardPro Member

Moderator

Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

11y

Originally posted by @Tim G.:

@Jered Sturm just thinking outside the box here. But anyway to work a deal with the developer for you to hold on to the property for the full year?

Aside from the great info @Brandon Hall provided, this is also good advice in an effort to reduce your tax implications if the other exclusions do not fly and I would highly recommend you work out a deal with the developer to make that happen so you have a back up for reduction in tax exposure.

Roy N.Pro Member

Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes

11y

Originally posted by @Tim G.:

@Jered Sturm just thinking outside the box here. But anyway to work a deal with the developer for you to hold on to the property for the full year?

That is precisely where I was headed. Any chance your could sell him an option now which fixes he strike price on the house and he could start developing at the other end of the block and give you an additional 3-4 months?

Jane A.

Investor · Shawnee Mission, KS · Member since 2015 · 423 posts · 114 votes

11y

Was developer able to sign a closing docs with a date 3 months late? Could developer make two payments - 50% this year and 50% next year ?

OP

Investor/Syndicator · Cincinnati, OH · Member since 2014 · 470 posts · 599 votes

11y

Thanks for the input everyone Unfortunately @Will Barnard @Tim G. @Jane A. the developers did not budge on the close date at ALL in negotiations. I was able to negotiate a substantial (more then the tax burden from not being 1 year) price increase to accommodate their close date so I guess it worked out.

http://www.offshorepress.com/vkjcpa/preparer_penalties.htm

Laura Turner

Lancaster, PA · Member since 2014 · 29 posts · 4 votes

11y

Maybe you could take the deduction, but cya - disclose it on Form 8275?

Podcast Guest on Show #130

Will BarnardPro Member

Moderator

Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

11y

Originally posted by @Jered Sturm:

Thanks for the input everyone Unfortunately @Will Barnard @Tim G. @Jane A. the developers did not budge on the close date at ALL in negotiations. I was able to negotiate a substantial (more then the tax burden from not being 1 year) price increase to accommodate their close date so I guess it worked out.

I hope so. I also hope that you were properly represented as "substantial" is a very subjective adjective. Depending on the numbers from the opposite side of the table, it may not be. Is the deal closed or still in escrow?

OP

Investor/Syndicator · Cincinnati, OH · Member since 2014 · 470 posts · 599 votes

11y

@Will Barnard

We are closed. Learning now what everyone else around me sold for I did quite well on negotiations.

In addition to the many items I have to back my partial exclusion case I have convince the developer to sign a letter stating they could and would have developed around me if I would not have sold. If they would have done this they believe my parcel would have drastically dropped in value. Im hoping this will only strengthen my case if I did get audited.

@Brandon Hall

They closing agent is going to send me a 1099 for the sale of the home. Does this mean I need to fill out a form explaining my partial exclusion on my return?

CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes

11y

@Jered Sturm

You have to report the gain if you received a 1099-S. If you decide to go for the partial exclusion, you will report the gain on Form 8949.

Hope this helps.

Tyler Clark

Chicago, IL · Member since 2016 · 1 post · 0 votes

10y

Hi @Brandon Hall!

We're in a similar, but slightly different situation.....we live in a condominium and a developer has approached the association and offered to buy the entire building. We closed on the condo in March of this year and the sale would probably take place on November 1st.

The association must vote to accept the offer. If the vote is 75% or greater, we are forced to sell or enter a type of arbitration where the purchaser only has to offer fair market value under state law (Illinois).

But for the vote and forced sale, we would not be selling our home.

I have looked everywhere to find some guidance on this, but can't find anything. Any thoughts on whether this would qualify as unforeseen?

Thanks so much!

Tyler

Originally posted by @Brandon Hall:

@Linda Weygant thanks for the mention!

@Jered Sturm I do have key word alerts set up for my name and I appreciate your kind words!

Unfortunately, I take the position that this sale will not qualify for the "unforeseen circumstances" test as the developer buying up the neighborhood improves your financial position. Additionally, "unforeseen circumstances" is the hardest test to qualify for as there is a lot of grey area in the code and rulings (the other two tests are employment and health).

Per Reg. Sec. 1.121-3(e)(1):

In general. A sale or exchange is by reason of unforeseen circumstances if the primary reason for the sale or exchange is the occurrence of an event that the taxpayer could not reasonably have anticipated before purchasing and occupying the residence. A sale or exchange by reason of unforeseen circumstances (other than a sale or exchange deemed to be by reason of unforeseen circumstances under paragraph (e)(2) or (3) of this section) does not qualify for the reduced maximum exclusion if the primary reason for the sale or exchange is a preference for a different residence or an improvement in financial circumstances.

The gains will be subject to capital gains tax instead.

Hope this helps!

Brent Drawver

Member since 2018 · 2 posts · 0 votes

8y

@Brandon Hall we bought our house 3 bed 2 bath with the knowledge we were pregnant with our 3rd child. 2 boys 1 girl if it matters. I am looking to sell my house now because we are unexpectedly pregnant with our fourth child and looking for a bigger home so each kid can have their own rooms. Waiting to find out the sex of the 4th but if it is a boy then I don't believe 3 kids legally are allowed to share a room. If it is another girl I am not sure if it still constitutes qualifying for the exclusion based off the house just being two small for a family of 6. I deeme the house to the section below. But I am curious if it would fall under the same area as some of the past judgements do.

Letter ruling 200652041 or 200613009

The home became significantly less suitable as a main home for you and your family for a specific.

Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

8y

@Brent Drawver

I assume you're asking about the partial exclusion in a situation when you have not lived in your current home for 2 years.

One of the "safe harbors" in the Regulations is "Multiple births resulting from the same pregnancy." By extension, your situation probably qualifies as well.