Taxes: Selling 2 Properties Claiming Exclusion of Gain + Partial

[JoeTaxPayer]

I sold two properties last year, one of which was a rental, but both pass the look back test. Would I be able to claim the exclusion of gain for my primary residence and claim a partial exclusion for my renal or vise versa?

If so, how would I apply the exclusion(s)?

I am married filing jointly and my wife isn't on the rental house. Could I claim the exclusion on the rental and partial on the primary, at which point my wife has never claimed an exclusion or is there more reasonable guidance.

My claim is that due the theft of my car and the burden placed on me financially and mentally qualifies as an unforeseeable event that caused me to move to a cheaper safer house.

My tax preparer disagreed and has asked that I pick up my paper work.

 

[quincy]

What is the name of your state?

 

[JoeTaxPayer]

Arkansas; tax question is federal.

 

[Taxing Matters]

I sold two properties last year, one of which was a rental, but both pass the look back test. Would I be able to claim the exclusion of gain for my primary residence and claim a partial exclusion for my renal or vise versa?

For federal income tax you may apply the exclusion to just one sale every two years. So you need to figure which of the two will get you the bigger gain exclusion and use the exclusion on that property.

My claim is that due the theft of my car and the burden placed on me financially and mentally qualifies as an unforeseeable event that caused me to move to a cheaper safer house.

Needing to move due to unforeseen circumstances only matters if you don't meet the two year ownership and use tests for the property. You say you meet them for both so that's not a factor here.

 

[JoeTaxPayer]

@Taxing Matters I'm still thinking that I should qualify for a partial exclusion for one. I don't see a document that says having claimed the exclusion is automatic disqualification. See below, Part B Step 1 Q3, there would be pointless. What am I missing? Can you point me to a document that says you can only claim a partial exclusion of gain every two years?

A) Determine if you are eligible for the maximum exclusion limit.
Status	You are eligible for the maximum exclusion if...	Maximum exclusion	If you’re not eligible for the maximum exclusion limit, then you should…
Married filing jointly	Both spouses meet the residence and look-back requirements and one or both spouses meet the ownership requirement.	$500,000	Determine if either spouse is eligible for the full limit as a single person. If not, determine if either spouse is eligible for a partial exclusion.
Single, married filing separately	You meet the residence, ownership, and look-back requirements.	$250,000	Determine if you are eligible for a partial exclusion.
Widowed	You sell your home within 2 years of the death of your spouse. You haven't remarried at the time of the sale. Neither you nor your late spouse took the exclusion on another home sold less than 2 years before the date of the current home sale. You meet the 2-year ownership and residence requirements (including your late spouse's times of ownership and residence if need be).	$500,000	Determine if you are eligible for the full limit as a single person. If not, determine if you are eligible for a partial exclusion.
B) Complete this section only if you have determined that you aren’t eligible for the maximum exclusion but are eligible for a partial exclusion. If you are eligible for a partial exclusion, use this section to determine your exclusion limit.
Step 1	Determine the shortest of the following 3 periods:
	1. Your time of residence in the home during the 5-year period leading up to the sale	_____
	2. Your time of ownership of the home leading up to the sale	_____
	3. The time that has elapsed between the sale and the date you last sold a home for which you took the exclusion if you had done so	_____
Step 2	Take the smallest period from Step 1 (you may use days or months) and divide that number by 730 (if using days) or 24 (if using months)	_____
Step 3	Multiply the result from Step 2 by $250,000. Stop here if not married filing jointly	_____
Step 4	Repeat Steps 1–3 for your spouse and add the two results	_____
C) Your exclusion limit is $___________. Unless you have taxable gain from business or rental use (see Business or Rental Use of Home ), only gain in excess of this amount is taxable.

 

[Taxing Matters]

Can you point me to a document that says you can only claim a partial exclusion of gain every two years?

You can get a partial exclusion for the second property you sold if you can show that you had to sell the property in which you were living because of unforeseen circumstances. But that exclusion is pro rated based on the number of days between the two sales divided by 730. So if the two places were sold 73 days apart, you'd get 10% of the maximum exclusion, i.e. up to $50,000 of gain could be excluded if you are married filing a joint return. I'm not confident that the IRS would accept your reason for having to move as a qualifying "unforeseen circumstance", so you will take some risk that the IRS may say that you don't qualify for that partial exclusion.

 

[LdiJ]

I sold two properties last year, one of which was a rental, but both pass the look back test. Would I be able to claim the exclusion of gain for my primary residence and claim a partial exclusion for my renal or vise versa?

If so, how would I apply the exclusion(s)?

I am married filing jointly and my wife isn't on the rental house. Could I claim the exclusion on the rental and partial on the primary, at which point my wife has never claimed an exclusion or is there more reasonable guidance.

My claim is that due the theft of my car and the burden placed on me financially and mentally qualifies as an unforeseeable event that caused me to move to a cheaper safer house.

My tax preparer disagreed and has asked that I pick up my paper work.

You got good advice from TaxingMatters. I am going to address something completely separate.

Tax professionals can be fined, sometimes a very significant fines, for taking positions on tax returns that are not supported under the tax code and/or the facts of the matter. When a tax professional tells you to pick up your paperwork, its because the tax professional does not believe that the position you want them to take is defensible.

It is of course possible that they are wrong, or that they are ultra conservative, or that they have been burned badly by the IRS in the past and are unwilling to take risks. However, I would guess that 9 times out of 10, its because you want them to take a position that truly is NOT defensible.

You really should consult with at least two or three other tax professionals about the matter before you decide to proceed as you believe you should.

 

[JoeTaxPayer]

I understand, I'm trying to get more opinions and that's why I'm here. From the get go I was pretty much thinking what @Taxing Matters was saying. That my reasoning is a bit of a stretch, but other than that it should work. Understanding that they maybe fined for taking such a stretch does help me understand it a bit more too.

Do you think I can get the IRS to weigh in on the situation given the current health climate? Perhaps by letter?

 

[FlyingRon]

Note that one thing that further throws a problem into the calculation of which property gets you the better exclusion is the period of non-conforming use on the one that you converted into a rental.

 

[LdiJ]

I understand, I'm trying to get more opinions and that's why I'm here. From the get go I was pretty much thinking what @Taxing Matters was saying. That my reasoning is a bit of a stretch, but other than that it should work. Understanding that they maybe fined for taking such a stretch does help me understand it a bit more too.

Do you think I can get the IRS to weigh in on the situation given the current health climate? Perhaps by letter?

No, I don't think that you could get the IRS to weigh in on it...at least not without spending a lot of money. The fee to get a private letter ruling is between $2800 and $30000 based on your overall income level for the year in question. It would also likely take quite a while to get a private letter ruling given the conditions in the country at this time.

 

[Taxing Matters]

Do you think I can get the IRS to weigh in on the situation given the current health climate? Perhaps by letter?

The oral advice of an IRS employee on a tax return position is not binding on the IRS; only written determinations are binding and those are only done through the private letter ruling (PLR) process, which as LdiJ noted above is not cheap. Those letters only come from IRS counsel in the national office in DC, and as someone who used to author PLRs I can tell you they typically are not done all that fast even in normal conditions, and it will take longer now as most in the national office of counsel now largely work from home. Part of the reason this takes time is that the IRS is fairly careful in its rulings because the PLRs are made public (with identifying information removed). This assumes the IRS would agree to rule on this in the first place, and that's not assured.