From: Dana Point, CA

Dear TaxMama:

This is a question about capital gains tax.

I sold a condo after living in it for about 15 months. I want to claim "Unforseen Circumstances".

How do I do that?

Do I just not pay tax and wait for the IRS to ask me to prove it? Or is there a form I fill out to get approval to pro-rate?

If I don't qualify then do I just add my profit to my total income? Or is there a separate capital gains tax I have to pay on top of income taxes?

Thank you.

Corey

 

 

 

Hi Corey,

Well! Someone's been doing some research. Hardly anyone knows about this little loophole.

I don't know of a specific form, offhand.

But here's what you should do.

Report the sale.

Compute your profit after all costs are deducted.

If it's under 15/24th of $250,000 (or $156,250) you won't owe any money - if your unforseen circumstances are valid. (Naturally, if you're married, the amount is double.)

So, if your situation qualifies, show -0- profit on Schedule D.

Then, attach a brief, but complete, explanation of the situation and why you had no choice but to move 9 months early.

Don't file electronically - file on paper so you can attach this to your tax return.

If your profit is higher than the pro-rated amount of the personal residence exclusion, pay tax only on the difference.

For instance, if you bought it for $200,000 and sold it for $375,000 (net of costs) your profit will be $175,000.

So you'll pay tax on $18750 (175000 - 156250)

You'll report on Schedule D:

Sales Pric:e $375,000
Cost: 356,250 ($200,000 cost + $156,250 exclusion)

Long term Capital gain - $18,750 (it's over 12 months)

I hope that helps.

Best Wishes,
Eva Rosenberg, MBA, EA