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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7195
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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I have a new client that received a letter from IRS

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I have a new client that received a letter from IRS indicating she did not report the sale of her house in 2012 and asking her to pay back taxes. This house she had for a few years, did repairs and upgrades that increased the value to about $880,000 as
per stAte assessment. She sold it for $770,00. is it necessary to amend her tax and send a schedule D? Should we just send an explanation? She did rent part of the house for a few years (50%)
The best way to respond, depends upon the composition of the notice.
It may be that a letter of explanation will suffice, or it may be necessary to file an amended return.
It sounds like the IRS may have received a 1099-S, given the amount of the sale, and she failed to report the transaction on her tax return.
If a 1099-S were issued, she would have had to report the sale even if it resulted in a loss, which of course wouldn't have been able to be claimed on her tax return.
Of course the assessment doesn't mean anything, she has to have the records as to what she paid for the property plus improvements, etc. to indicate whether she actually had a loss on the sale. I doubt the depreciation recapture would be a factor if she only rented 50% of the property for a few years. But of course, that depreciation (whether she actually claimed it or not) would reduce the basis of the property.
Do you have a copy of the notice available?
Customer: replied 2 years ago.
Yes, a 1099 S was sent. It seems to me like she will need to file the 1040 X and an explanation. The house was purchased by her and her husband years ago, he passed away in 2009 or 2010 so she had to sell. Will docs have to be attached to the 1040x? What do you recommend?
Customer: replied 2 years ago.
Not dure how much she paid but she did about 200,000 in renovations between 05 and 09. Still owed about 570,000 in mortgage.
Please remember that I have no idea as to the extent of your technical background, so if my comments here are too basic for you, I apologize.
I'm not sure if you know the exact year when the home was purchased, or what the client's history is in that regard (in other words whether or not there was any deferred gain from a previous personal residence sale, for example), but if the property was jointly held at the time of the husband's death, she would have received a "step-up" in tax basis for his 50% share of the home to 50% of the Fair Market Value at the Date of his Death; her 50% of the home would be valued at 50% of their original tax basis in the property (either 50% of the original cost or 50% of the adjusted basis if there was a deferred gain from a previous personal residence sale.
If by some chance the property was acquired prior to 1977, the rules were different at that time.
As far as improvements are concerned, she would be entitled to an increase in basis for 50% of the improvements up to his Date of Death, and 100% of the improvements subsequent to his Date of Death up to the Date of Sale. 100% of the closing costs would also increase her basis in the property.
As you can see, it can get quite involved when a death is involved.
She would be entitled to an exclusion of capital gain up to the maximum for Single filers or $250,000. She loses her husband's 250L exclusion, but the adjustment for his 50% to the FMV at this date of death should more than make up for it.
Depending upon what the actual notice says, I agree that a 1040X is the appropriate response, but a copy of the notice should be sent along with the 1040X. Attaching documentation isn't necessary, but given the inquiry, I would probably attach a Schedule which summarizes the basis computation, if nothing to indicate that the proper method was used to determine the adjusted tax basis.
Naturally, what is common in these circumstances, is that certain figures will have to be estimated as the records may not be readily available. What is acceptable in that regard will hinge upon what type of gain, if any is involved. If after the appropriate basis adjustments, it is unlikely that there could be any taxable gain, I wouldn't get too concerned about the extent of the estimates.
The biggest adjustment is likely to be the adjustment to the FMV of the husband's 50% interest in the home as of his Date of Death, & given the real estate market most everywhere, it isn't likely that there was a lot of appreciation in the FMV of the property between his Date of Death & the Date of Sale. The rest, if any, would likely be covered by her $250,000. exclusion, hopefully eliminating any real tax exposure on the sale.
The may be some depreciation recapture involved, depending upon the circumstances surrounding the property's rental and how the depreciation was treated.
Hope this helps.
Stephen G. and 3 other Tax Specialists are ready to help you
Customer: replied 2 years ago.
Got it, thanks for the info, truly helpful.
Customer: replied 2 years ago.
Stephen: In following up with the reporting of the sale of a home, what can be deducted from the total sale and where do we show the adjustment as far as the 8849 form is concerned? In other words, the legal fees paid, taxes, concessions, where do I deduct that in the form? Also, if the tax payer still owed money on the property and that was paid to the bank, should that be excluded? Thanks!
All selling expenses, including the items you mentioned, would be added to the tax basis of the property and reflected there on the 8849. Just like improvements, they don't have to be separately stated, just included in the tax basis of the property.
The key is the the gross proceeds, ie. selling price, that you reflect on the 8849 should agree to the 1099-S.
As far as payments on the mortgage paid to the bank at the closing, that would not be added to the basis as the basis starts with the cost of the property & to that you add improvements, etc. Mortgage principal payments would "double up" on those items.
If there was interest paid at the closing, that would be an itemized deduction.
Anything else or if I can clarify anything, just ask?