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Relocation and home-sale gains
Dear Tax Talk:
My husband and I have lived in our Virginia house
for 18 months. We are relocating out of state to Pennsylvania, where
I have accepted a new position. Our house has gone up in value from
$385,000 to approximately $500,000. Will we be liable for capital
gains tax because we have lived in the house less than two years
or will capital gains be waived because of moving due to relocation?
Michelle
Dear Michelle:
When Congress liberalized the law on home sales a few years ago,
it really liberalized the rules for relocation moves. If you have
to sell your principal residence as a result of a job-related move,
you get to exclude a generous amount of gain. Generally, it works
out to more than most properties could ever appreciate in a short
period of time.
The general rule is that if you lived in the home
for two years out of the last five years you can exclude $250,000
in gain ($500,000 for a married couple filing jointly). If you don't
meet the two-year rule because of a job-related move, your exclusion
is the number of months you occupied the home divided by 24 months
multiplied by the general exclusions.
In your case, since you are married and used the home
for 18 months, your exclusion is up to $375,000 -- 18 months lived
in the house divided by 24 months times $500,000 joint filer exclusion.
This is more than the $115,000 in gain you realized ($500,000 sales
price less $385,000 cost), so you won't pay any tax on the home
sale.
Dealing with a tax debt
Dear Tax Talk:
In 1997 I arranged to pay back taxes from a previous year. Since
I was earning very little at the time, but owed a lot, I arranged
to pay only $110 per month.
The total amount owed includes the following breakdown:
$9,959.38 (total), $1,171.24 (penalty), $3,665.51 (interest). I
don't contest the back tax, but the penalties and interest are killing
me. Now I have several questions:
1. I want to increase my monthly payment (maybe double
it when possible) to the Internal Revenue Service, but friends say
any activity draws further scrutiny and they may demand full payment,
something I can't afford right now. Is this true? The IRS people
I've talked to won't or can't say.
2. Other friends say I should renegotiate, but I did
such a "great" job the first time I am afraid of getting
nailed again. Would using one of the tax services as a go-between
be helpful or are they just one more rip-off? It burns me to see
other (ahem) tax cheats (resisters?) pay pennies on the dollar.
If I used a tax service, what would be a fair price to pay?
3. If this thing is hanging on my neck in three years
when I plan to purchase a home, will it negatively affect my chances
of getting a mortgage?
Ken
Dear Ken:
Everyone fears the IRS when they really should not. If you're in
a payment plan, you have a minimum payment due each month. You don't
have to renegotiate with them to increase your payments, just pay
more. The tax, interest and penalty will be reduced that much faster.
Trust me, at $110 a month the IRS hardly notices you.
Probably the only reason you would hire a tax go-between
is if you're trying to get the IRS to compromise the liability for
less than what is owed. If you can afford to pay more than $110
a month, I don't think that asking the IRS to renegotiate the debt
down further is going to work. Generally, an offer to compromise
tax debt is accepted when the offer is at 50 times the amount that
you can afford monthly. If you can afford to pay $200 a month, then
50 times that works out to $10,000, which is more than the tax due.
If you want to buy a home in three years, then you
should work to have this debt paid by then. It has been my experience
that lenders do not look favorably on unsatisfied IRS liens.
-- Posted: July
31, 2001
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