Section 121 - Partial exclusion of gain

[Mark Simpson]

I am trying to help a previous client avoid a healthy capital gains bill on the sale of their primary residence.  Trying not to spell it out to them directly though out of concern of giving tax advice outside of my scope.

I was the listing broker when they purchased their current primary in mid Jan 2017.  Additionally they sold and presumably took tax free gains on their previous primary, on 12th Jan 2017.  They just listed their current residence, and it's due to close Dec 12, 2018...23 months after purchase, and 23 months after sale of a prior section 121 exclusion property. Clearly they fail the eligibility test!  I pointed it out to them and suggested they consult a tax adviser.  The response from their H&R Block accountant was 

"Hi xxx,

The exclusion for gain of a married couple is $500,000 ($250k per couple). It is actually prorated if the time is less than 24 months. That would make for the exclusion at 23 months to be $479,000 still. So you should be fine.

Sincerely,

ABC Accountant"

Now I am 99% sure they don't qualify for the 'partial exclusion of gain' exception AS IT WAS INTENDED (They plan to repurchase in the same town, no health issues or other extenuating circumstances I'm aware of)....that "ABC" is so confident in - or seems to think is a flat rule that broadly applies to everyone. (I flip 8-12 homes a year and if it were that easy my wife and I would have a new primary with a 50k profit every 3 months!)

SO, my questions to you tax experts out there are...

How likely are they to get audited (I mean the purchase and sale dates are right there on their returns!...not to mention the prior exemption they've taken inside 2 years)?

Does the partial exclusion get challenged so rarely people are getting away with this so much it's just standard practice within reason?

Assuming I'm correct in my concerns, and they get audited does H&R Block need to come to the party for the bill given they have given such atrocious simplistic advice in writing? 🤣

Thanks in advance!

[Wayne Brooks]

If you want to help them, You pay a couple of hundred bucks for them to sit down with Your cpa of choice.....they’ll get it straight and you get some good will (and stay out of legal trouble).