IRS CP2501 Notice - Did not report income on sale of home

[Asiago80]

Sold my primary residence in 2015  and did not recieve a 1099-S that I remember. Met all the requirements for the no taxation on the up to $500K capital gains, but I failed to report it on my return.  IRS sent the notice.  What should I send the IRS to get this taken care of? 1040D, form 8949...anything else?

[BMcCalpin · Accepted solution]

As you know, you must report the sale of your home if:

• you did not own it at least 2 of the last 5 years
• you did not use the home as your personal residence for at least 2 of the last 5 years (these don't have to be the same 2 years as the first bullet point)
• you received a 1099-S
• you took depreciation for an office in home or other use which you have to recapture (or other amount that cannot be covered by the home sale exclusion)
• you used the exclusion on home sale within the last two years
  

If you don't fall into any of those categories, I would respond to the IRS in a polite and timely manner (always important) pointing out the requirements found in Tax Topic 701 Sale of Home (https://www.irs.gov/taxtopics/tc701.html) and note the following (if they are all true):

• you owned the house from XXX to XXX, satisfying the ownership rule
• you used the house as your main residence from XXX to XXX, satisfying the residence rule
• you did not receive a 1099-S nor did you expect to
• you did not take any depreciation in the house or have other gain that could not be excluded
• you have not taken the home sale exclusion in the last X years (or ever)
• you did not report the sale because you could not see why you were required to
  

It's up to you, but I would consider doing this because the IRS might be mistaken on the reasons why they sent you this notice. Ask them to tell you why they need the Schedule D. They may come back with the reason (good or bad), which you will want to know and want to correct, or they may realize that you met all the requirements not to report the sale and tell you "nevermind".

If, however, they want the Schedule D anyway, then give them exactly what they ask for. But, at least, you have communicated with them in a timely manner, which is critical to good relations with the IRS.

[Asiago80]

Thanks...will contact them and explain everything....

[Velthrian]

Hi Asiago80,

I received the same thing from IRS today.  What did you do with your case and what was the outcome?

Thanks and appreciate your help.

[Critter-3]

If the IRS is questioning this then a 1099-S was issued ... look in the pile of paperwork the closing company sent home with you ... that is probably where it is hiding since they usually do not mail it out in January like a W-2.

If you completed the home sale worksheet in the program then you can print it out and send it with an explanation that it was your personal residence and you did not profit more than $250K ($500K married) so you don't owe any taxes.  In the program, if you knew you had a 1099-S, you just needed to click the box to have this be reported on the Sch D to avoid the IRS letter.

[Velthrian]

Thank you for the reply.  In the form, IRS has 2 options:

1.  I agree with all changes

I understand the IRS will send me a notice stating the proposed changes to my tax return and the amount of additional tax I owe.

2. I don't agree with some or all of the changes.

Please return this form and include a statement signed by you that explains what you don't agree with.

Which option do I go with?  I think it is option 1 but will they just charge me tax even if I provide an explanation? 

[Critter-3]

@Velthrian 

Either you agree in full with the IRS proposed changes which is option one or you disagree with all or some of the IRS proposed changes which is option two. Pick the one that is most appropriate for you. If it’s option one then you have the ability to make a payment right away. You don’t need to wait for another bill from The IRS because the longer you wait the more the penalties and interest will accrue. If you don’t agree then you need to respond and show what you don’t agree with by sending in supporting documents for your position. Whatever you do respond in a timely manner and be polite. Any answer you send should be short And concise.