GAIN ON SALE OF PRINCIPAL RESIDENCE Charlie and his wife lived in the house for
ID: 2466070 • Letter: G
Question
GAIN ON SALE OF PRINCIPAL RESIDENCE
Charlie and his wife lived in the house for the last 15 years. In 2010 due to some unknown reasons, he demolished the house and constructed house on the same lot. The house was completed in 2011 and decided not to stay in the same house. He sold the house in 2014 at gain of $547,000. He excluded gain of $500, 000 (exclusion allowed for MFJ) and paid capital gain on $47,000. He was audited for 2014 and IRS had a different idea.
1. what is wrong with this case?
2. what should be done to help this client?
3. what is the IRS going to do?
4. does this client qualify for exclusion? If so how much? why?
5. Is the gain from the sale need to be reported? why?
Explanation / Answer
1. Though charlie and his wife file tax jointly, According to 26 U.S code Sec 121(a) any gain from sale of house upto value of $500,000 can only be excluded if either or both spouses meet the ownership and stay at least of 2 years prior to sale of house. But in this case charlie and his wife has not stayed in house after completion of construction in 2011,hence not elgible for exclusion.
2. To help this client need to advise to show for a stay of more than 2 years prior and after to construction completion, so that could claim for exclusion.
3. IRS is going to collect tax payable by client on total gain of $547,000 and any penalities thereof for claiming exclusions wrongly.
4. Client will qualify for an exclusion of $250,000 for gain on sale of house, which is a general exclusion available for all the individuals. This is because of reason that charlie and his wife has not stayed in house after completion of construction in 2011,hence not elgible for exclusion of $500,000.
5. This gain of sale need to be reported as capital gain, because it is taxable as per sec 121 of U.S code 26.
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