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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

Customer Question

I have sold a house. I lack living there for two years by 25 days. Is there any way to have the Capital Gains tax pro-rated since I've lived there for 23 months? It's going to cost me about $7,600 because of CGT.
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

It may be possible for you to exclude all of your gain if the reason you sold your principal residence meets one of the qualifying exceptions below. Generally, for individuals who own and use a property as a residence for less then 2 years, they must have sold because of a job change, medical reasons or for some other unforeseen circumstance to qualify to use a pro-rata exclusion. Let me explain the rules in more detail and if you have additional facts that may clarify things then I will be happy to give you my opinion on whether you qualify for such an exclusion.


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 capital gain 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.


Most states have 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 likely be the same for your resident state tax purposes as well. If you indicate what your resident state is I can confirm this for you.


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.



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
Christopher Phelps and other Tax Specialists are ready to help you
Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: I live in Kentucky. I have a slipped disc and pinched nerves in my back brought on by scoliosis, but it's just recently become a problem (in the last year). We have 31 steps to our front door and it is a two story house. We are buying a one level house to get away from the stairs. My CPA has told me that if I'm not in a wheel chair, then I don't qualify.
Expert:  Christopher Phelps replied 11 years ago.

I suggest you confer with your doctor and tell him/her everything that has happened. Iwould specifically ask the doctor to put in writing a recommendation that you need to move into a home that is less stressful on your condition. A doctor's recommendation will satisfy the medical exception for granting a pro-rata exclusion per the relevant IRS regulations. Some may say that an after-the-fact recommendation won't work, but I disagree.


Alternatively, if that would fail with the IRS (in the event of an audit) I believe you may qualify under the unforeseen circumstances exception. While your circumstances would not qualify under a previously enumerated exception, I believe you may qualify under the IRS guidelines for evaulating individual situations.


Specifically, the IRS will evaluate an unforeseen circumstances inquiry under the regulations is the extent to which:


The sale or exchange is proximate in time to the circumstances allegedly causing the sale; the suitability of the sold property as the taxpayer's principal residence has been materially changed; the taxpayer's financial ability to maintain the property has materially impaired; the taxpayer actually uses the sold property as a principal residence; whether the circumstances allegedly giving rise to the sale are reasonably foreseeable when use of the property began; the circumstances allegedly given rise to the sale actually occur during the taxpayer use and ownership of the property.


Given the above I think you may also want to evaluate taking a position that due to the unforeseen circumstance of your physical condition, the suitability of your property for your original intended use (i.e. principal residence) has materialy changed thus potentially qualifying you for a pro-rata exclusion.


If you want assurance about this position with no possibility of penalty, then you would need to request a private letter ruling from the IRS (cost is anywhere from $1,000 - $5,000 depending on who you get to prepare it). Alternatively, you could take the position and wait an see.


I recommend if your CPA will not change his position, that you seek out a second opinion. It sounds to me as if he has not really dug into the rules and looked at the underlying regulations.


Thanks for the payment.


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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