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Psoresitam
Level 1

Capital gains

I sold my home on April 1st and made a $90,000 profit. Unfortunately I was only in my house q8 months because I had no idea I moved next to drug dealers! So I sold it. I am looking for another place and living with friends for now... but wanted to pay my capital gains tax (I understand I have to pay this for living in a house less than 2 yrs)  and want to know:

1- what forms do I need?

2-how much do I owe? (I assume at my income level it will be 15%) 

3- can I pay this NOW instead of at the end of the year so that I know how much I have to work with for a down payment on a new place?

R-how?

Thank you kindly! 

Phillis

6 Replies
Nick-K-EA
Employee Tax Expert

Capital gains

Congratulations on selling a home next door to a drug dealer for a $90,000 profit. The great news is, you didn't have to sell at a loss. The bad news is, yes, you will have to pay taxes on the gain.

 

In order to calculate your gain, you will take your original cost, and add anything which increases the basis. Some of the fees you paid when you bought it can be added to the basis. Here's an article which explains how to determine your basis:

https://www.nolo.com/legal-encyclopedia/determining-your-homes-tax-basis.html

 

Then, you need to determine your net proceeds. That will be the sale price, minus any costs of sale. You can deduct the cost of the real estate agent fees, cosmetic improvements and staging to increase sellability, and seller paid closing costs, from the net proceeds. The difference between your basis and net proceeds is your gain. In order to avoid interest and penalties, you should make an immediate estimated tax payment of the appropriate amount based upon your tax rate and gain calculation.

Nick K, EA
fanfare
Level 15

Capital gains

you should look up the rules in the IRS Pub for selling your home.

You can prorate the ineligible amount even if your weren't there for 2 years,

if you were forced out for unusual circumstances. 

I think this qualifies.

Nick-K-EA
Employee Tax Expert

Capital gains

It may indeed qualify for a special exception. In Publication 523, they allow for a pro-rated exclusion if "The home became significantly less suitable as a main home for you and your family for a specific reason" that was not anticipated at the time of purchase. I'm not sure whether TurboTax will support these special exclusions, and if not, you will have to have your taxes prepared for you. But if you can exclude most of your gain, that would be worth it.

 

"

Nick K, EA
Opus 17
Level 15

Capital gains

This is tricky.  You can claim a partial exclusion of your gain if you moved due to unforeseen circumstances.  There are some "safe harbor" rules; if you meet these rules, the IRS will not question the exclusion.  The safe harbor rules relate to changing jobs, losing a job, medical reasons, and a couple other things.  If you don't meet a safe harbor rule, you can still use the "unforeseen circumstance" rule to claim a partial exclusion, but the IRS may audit you.  

 

The partial exclusion rule means that if you lived there 8 months, you can exclude 8/24th of the normal $250,000 limit.  The actual percentage is calculated based on the exact number of days you owned or lived in the home as your main home, whichever is less.    For example, if you moved out after 3 months, or 90 days, but you didn't sell until 8 months, your exclusion would be 90/730, or 12.3% of the usual limit, or about $30,000.

 

Turbotax will calculate the partial exclusion for you, if you tell the program you moved out due to unforeseen circumstances.  You don't send proof with your tax return, but keep proof for 3 years in case of audit.

 

To reduce your capital gains further, be sure to document every possible adjustment.  You can increase your cost basis by certain of your closing costs when you bought the home, and you can decrease the selling price by certain expenses of selling.  This is all covered here https://www.irs.gov/pub/irs-pdf/p523.pdf

 

Whatever part of your gain is taxable, will be taxed at regular income tax rates.  You did not own the home for more than 1 year, so you don't get the special long term capital gain rate.   The rules on the holding period for  long term capital gains are still enforced even if you qualify for a partial exclusion due to unforeseen circumstances.   Your regular income tax rate is probably 22% or 24%, but could be as high as 37%.

 

To avoid a penalty for under-paying your taxes, you should make an estimated payment as soon as you can.  (For a sale date of April 1, the estimated payment was due June 17.)   You can pay at www.irs.gov/payments.  Choose "2021 estimated taxes" or "2021 form 1040-ES" from the drop-down menu.  Be sure to tell Turbotax about the estimated payment when you prepare your return (Turbotax will not automatically know.)

 

To report the capital gains you would include a form 8949 and a schedule D on your tax return.  Any tax program should do this automatically. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Mike9241
Level 15

Capital gains

you should be able to rely on IRS LTR Ruling 200601009  - criminal activities in the neighborhood. this is a specific situation that the IRS has ruled is an unforeseen circumstance

 https://www.irs.gov/pub/irs-wd/0601009.pdf 

Opus 17
Level 15

Capital gains


@Mike9241 wrote:

you should be able to rely on IRS LTR Ruling 200601009  - criminal activities in the neighborhood. this is a specific situation that the IRS has ruled is an unforeseen circumstance

 https://www.irs.gov/pub/irs-wd/0601009.pdf 


While private letter rulings are not legally binding on anyone other than the taxpayer who requested it, it usually indicates the direction that the IRS will take when reviewing similar situations.

 

(Interesting to think that, I believe it costs $10,000 to obtain a private letter ruling, so the taxpayers in this case were selling a home that was both (a) in a criminal neighborhood, and (b) had so much gain in less than 2 years that it was worth it to pay $10,000 to save on the capital gains tax.  I don't think there are many houses that would fit that bill of particulars.)

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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