My husband and I were married in October 2004. He purchased
a home in January 2004 and sold it in November 2004, owning it for just over 10
months. After adjustments for improvement, commissions, etc., he is still turning
a gain of about $20,000. We are trying to find a way to avoid paying capital gains
on the profit.
We also now have my home up for sale and I
will turn a sizable profit on it. I have owned the house for four years. Will
I be OK excluding gains for the 2005 tax year? His home is 60 miles from where
I currently work and did work when we met. The distance I would have to drive
was the deciding factor on which home to keep and which to sell. Do we qualify
for any safe-harbor rule of any sort?
We took the profit from
the sale of my husband's home plus additional savings and put down 20 percent
on a new home that we are now living in as of this month. Evidently the rules
no longer give him any sort of tax break for reinvesting that money into another
home, correct? And we can only exclude capital gains on a residence every two
years, correct? So if we take advantage of it on his house (if we found a loophole
that would allow for that), then we would not be able to take advantage of it
on my home?
It seems crazy since the marriage and relocation
to be with his new family was the reason he sold the home so soon. It was an unforeseen
circumstance, but according to what I read in Publication 523 from the Internal
Revenue Service, it does not qualify as a special circumstance. If we end up having
to show the gain on our 2004 returns, is there a difference in percentage for
him owning it only 11 months vs. over 12 months? Please help. I am working with
a CPA that has basically sent me off to do my own research. Thank you.
I hope the CPA will understand why you fired him.
gain on the sale of a property held less than a year, such as your husband's house,
is taxed at a higher rate than 15 percent. Basically, it's counted as ordinary
income and taxed at your marginal rate. Divorce and separation are unforeseen
circumstances, but marriage is not listed as a safe-harbor unforeseen circumstance.
Safe harbor is a term the IRS uses to describe certain permitted transactions
that if described, will not be challenged by the IRS. Since you do not fall within
the safe harbor, you need to look closely at the intent of the law and regulations
to see if you can otherwise qualify.
The regulations say 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.
If your husband did not anticipate getting married to you at the time that he
bought the house, then it could be said that it was sold for unforeseen circumstances.
The two sales within two years are permitted, but each
of you is limited to a $250,000 maximum exclusion. So if you gained $300,000 on
your sale and your husband claimed an exclusion on his home, you would include
$50,000 in income on your joint return, even though he did not use all his exclusion.
my readers: I appreciate all the questions you send each week. But because of
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Tool Box. What you need may be there. If not, consider seeking an extension
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the tax answer you need. But remember: If you do get an extension, be sure to
pay what you might owe to avoid interest and penalties.