Tricky Tax question on sale of primary residence.
So I will begin by saying I have already spoke with my CPA regarding this. I am here for second opinions from other wise investors and CPAs.
I purchased a home 9 months ago to live in with my wife. Shortly after I bought the home I was approached by a developer who wanted to buy the entire street, demolish all the houses and build commercial. We are now about to close on the deal and will have a sizable gain on the sale. My original understanding was the gain from the sale of a primary residence is:
Not taxed if you live there for at least 2 of the last 5 years.
Taxed at cap gain rate(15%) if you lived there 1 of the last 5 years.
Taxed at ordinary income if you lived there for less than 1 year.
The IRS refers to the above as the "eligibility test"
And that is what my CPA told me. However I began to research some on my own and found IRS publication 523. In this publication they state "If you don't meet the eligibility test, you may still qualify for partial exclusion if you moved because of work, health, or an unforeseeable event.
The publication then goes on to say Important factors for determining if an event is unforeseeable are:
1) The situation causing the sale arose during the time you owned the home, and used the home as your residence.
2) You sold you home not long after the situation arose.
3)You could not have reasonably anticipated the situation when you bought the home.
4) You began to experience significant financial difficulty maintaining the home.
5) The home became significantly less suitable as a main home for you and your family for a specific reason.
I very strongly meet #1,2,3,&5 4 would be a stretch but could be claimed if I worded it right.
Now to my question. Now what? If I believe I meet the unforeseeable partial exclusion. Do I I have to ask for permission from the IRS. Do I just not pay the tax and keep all the documentation I can in case of an audit. DO I pay 15% cap gains rate on it or do I pay no tax on it?
Even my CPA is not 100% sure on the law. there seems to be a whole lot of grey area on this one. Can one with experience with this or better understands the law please shed some light!
I have read many great accounting articles on BP from Brandon Hall. Brandon Im hoping you have a key word alert set up for your name and can help :).
everyones 2 cents are welcome!