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Ask Christopher Phelps Your Own Question
Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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capital gains tax on manufactured home with a 40 year land l

Customer Question

i own a manufactured home in a park with a 40 year land lease, for about a year and 7 months. I want to buy a home now. can i do this without having to pay the 33% capital gains tax. i was told i had to wait 2 year mark. i intend to use the proceeds from the manufactured home to the new property. is my manufactured home considered personal property or real estate? eigther way will I get taxed? i have 60,000.00 loan and can sell for 170,000.00 can i be pro rated?
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

Your maufactured home definately counts as your principal residence for tax purposes. Unfortunately, you may no longer roll over the gain from the sale of your principal residence into a new residence under the old rules of IRC Sec. 1034. That law was eliminated in 1997 when IRC Sec. 121 was implemented. However, if you qualify for a safe harbor exception, you may be able to exclude some or all of the gain. See the following which explains the current rules for taxation of gain on the sale of principal residences:

Under IRC Sec. 121 if as of the date of sale you have owned and used a property as your principal residence for 24 out of the last 60 months, then you can exclude up to $250,000 of gain ($500,000 if married filing joint) if filing a single or MFS return.

If you have owned or used your property as your principal residence for less then 24 months you may not use the Sec. 121 exclusion (i.e. $250K/$500K exclusion) unless you meet a qualified exception. You may use a pro-rata exclusion if the reason you are selling is related to a job change, for medical reasons or for some other unforeseen circumstance (i.e. death, disability, divorce, job loss, financial hardship, etc.). See below for a more expanded explanation of the allowable exceptions.

The pro-rata portion of the exclusion is calculated by dividing the number of days you both owned and occupied the property as your principal residence by 730 days (i.e. two years). Multiply the resulting percentage by $250K if single or $500K if MFJ.

If you do not meet one of the exceptions, then the gain is taxable. Also, if your gain is in excess of the available exclusion amount, then the excess gain is taxable. If you own the property for more then one year, then the gain will be treated as a long-term taxed up to a maximum capital gain rate of 15% (5% if the gain would otherwise be taxable in the 10% and 15% brackets). Otherwise the gain is treated as a short-term capital gain and to the extent not offset by other capital losses will be considered as ordinary income the same as wages and interest subject to whatever your marginal tax rate is.

Gain is calculated as the difference between your net sales price and your adjusted cost basis. Net sales price is your contract sales price less all selling expenses (i.e. fix up and non-recurring closing costs). Your cost basis will be your original purchase price plus non-recurring closing costs on the purchase escrow plus any improvements made during ownership.

California has conformed to the Federal law described above. Accordingly, the manner in which your gain on the sale of your principal residence is treated for Federal purposes will also be the same for CA state tax purposes as well.

Initially, the reasons you indicated your selling (i.e. want a larger home) will not qualify you for a pro-rata exclusion of any taxable gain. Below I have provided an expanded definition of the qualified exceptions I stated above. You should carefully read the following section to see if you may qualify for an exception to use.

Expanded Qualifed Exception Definitions

A sale or exchange is due to a change in place of employment if the primary reason for the sale or exchange is a change in the location of a qualified individual's employment. As a safe harbor, the regulations provide that a sale or exchange is deemed due to a change in place of employment if the change occurs during the period of the taxpayer's ownership of the property and its use as the principal residence and the qualified individual's new place of employment is at least 50 miles further from the residence sold or exchanged than was the former place of employment, (or, if there was no former place of employment, the distance between the qualified individual's new place of employment and the residence sold or exchanged is at least 50 miles).

A sale or exchange is due to health if the primary reason is to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury. A safe harbor is provided for a physician recommended change of residence.

A sale or exchange is due to 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. Under the safe harbor rules, a sale or exchange is deemed to due to unforeseen circumstances if any of the following events occur during the period of the taxpayer's ownership and use as principal residence; in the case of a qualified individual, death, the cessation of employment if, as a result, the qualified individual is eligible for unemployment compensation, a change in employment or self-employment status that results in the taxpayer's inability to pay housing costs and reasonable basic living expenses for the taxpayer's household, divorce or legal separation, or multiple births resulting from the same pregnancy.

The unforeseen circumstance exception is rather open-ended and is subject to the taxpayers facts and circumstances. If none of the above exceptions applies, give me some more detail about the reasons for the sale and I can then give you my opinion about whether a pro-rata exclusion may be available.

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

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