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Taxtom
Taxtom, Accountant
Category: Finance
Satisfied Customers: 2364
Experience:  25 Years in preparing Personal and Business Tax Retuns
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Taxtom, I asked you last week about my dads $5 million home

Customer Question

Taxtom, I asked you last week about my dad's $5 million home sale. I am trying to get him ready for accountant and he is quite elderly. How is the mortgage handled? I presume since mortgage interest was already deducted each year, I presume only the total principle payments (over the years) he made are deductible against his sale? How does one find out what these were over 10 years? Ask the bank? So please explain how he handles the mortgage? He also had an ESA mortgage. At the closing he paid off both mortgages so I presume this is deducted from his proceeds right away? Also, remember he was acting as his own general contractor for much of the time. So you think that during the building and improving process (where he did a major expansion) he can deduct things like heat, electric, lawyer fees, etc. ? But for his taxes he just needs to have the simple 1040sd filled out with back up needed for an audit; right? Thanks
Submitted: 5 years ago.
Category: Finance
Expert:  Taxtom replied 5 years ago.

Taxtom :

Hello, No the principle payments are not deductible, that is why you need to add the total cost to arrive at basis. The mortgage is just a finincing function and is not considered in the cost. You would just take the sales price less commisions paid to the broker and any closing cost paid by your father to arrive at net sales value. During the building process he can add the utilities as part of the basis or investment into the property. He can take lawyer fees in conjunction with purchasing the property or fee an lawyer represented him in the permit process. He will fill out a 1040 and a 2119 sale of your home, here is a link to the instructions http://www.irs.gov/pub/irs-prior/i2119--1993.pdf. Please note if was a principle resident he would qualify for a one time exemption of $125,000 but since this is considered a second home he can not take that exemption. The 2119 instructions has a worksheet to calculate expenses of sale. You are correct the supporting documents are not included with the return. Be sure to give the accountant a copy of the closing statement you received at the closing. Thanks Tom

Customer: replied 5 years ago.
Please send me the link for the Form itself 2119. So on the closing statement which number does he start his deductions from? (Again I am just trying to get some broad parameters here). The sales price minus the broker commission and other fees on the closing statement that you mentioned? Then he deducts all his allowable expenses (including all those he wrote with mortgage money)? He does not deduct any interest nor RE tax since he did that over the years? Then when all is said and done (since he lives in NY), he will pay about 23% on the gain? Please correct me if I am wrong. Thanks
Expert:  Taxtom replied 5 years ago.

Hello again, He starts with sales price and then there is a place on the form to expenses of sale. The new form is not avialable yet so here is an older version http://www.irs.gov/pub/irs-prior/f2119--1997.pdf . He would add up the original cost of the property, add the expenses in building the house and other land improvements and this will be his adjusted basis (cost) of the house. Federal taxes would be 15% plus you would pay state and local taxes. New York state rates above $500,000 is 8.97%. You only will deduct current year taxes and interest on Schedule A.

Here is the full manual on taxes when you sell a home http://www.irs.gov/pub/irs-pdf/p523.pdf Thanks Tom

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