IRS Issues Opinion on Housing Profits

Las Vegas Real Estate

 

New Resolutions Resolve Ambiguity Over Capital Gains on Home Sales

 

I read an article in the Las Vegas Review Journal on 9/12/2004 written by Kenneth Harney that covers a sometimes "touchy" policy on granting tax exemption before a homeowner has fulfilled their occupancy requirements.

Back in 1997 and 1998 the IRS established new regulations to deal with the tax free exclusions that a single person or married couple are entitled to under the tax code. Under these regulations, a taxpayer (homeowner) is entitled to exclude up to $250,000 for someone filing single, or up to $500,000 if married filing jointly of capital gains tax related to the sale of their primary residence. There are a few exceptions to this two year rule, which result in a reduced maximum capital gains tax exclusion.

Some "exceptions" are more obvious and easier to determine than others. It can be proven rather easily that someone has a serious illness and needs to sell their house and move to, say, an assisted living residence. It is more difficult, as you can imagine, to determine what the IRS considers to be "unforseen circumstances."

One example that Kenneth Harney uses in his article was a purchaser who, after purchasing a house decides that "due to unforseen circumstances, does not like the house anymore." Not surprisingly, the IRS would not perceive this as a qualifying exception. Also not included as an exception would be winning the lottery and desiring a bigger, better home or getting married and needing to sell a home. In the case of marriage, where you are trying to maximize your tax benefits, it would be best to sell the house whose owner has less of a tax benefit than the person who, say, can exclude the maximum legal amount.

"Unforseeable," according to the article and to the IRS, are "events that the taxpayer could not reasonably have anticipated" at the time the house was purchased. Some examples that Kenneth Harney pointed out in his article include:

 

° The involuntary conversion of a home. Let's say the city of Las Vegas comes along and tells you that your home is right in the path of a new highway that's going in. This is involuntary and can be considered "unforseeen circumstances."

° Natural or man made disasters or an act of terrorism

° Death of the homeowner, spouse or co-owner who used it as a primary residence

° A change of employment status that results in the owner's inability to pay housing costs and basic living expenses for the household.

° Divorce or legal separation

° Multiple births related to the same pregnancy

Ultimately, what the IRS calls the "facts and circumstances" test is what determines the ruling on any matter.

 

Harney, Kenneth. "IRS Issues Opinion on Housing." Las Vegas Review Journal September 12, 2004: 4M.

 

 

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