Love some advice on taxation!

6 Replies

Hello all,

I am a chef that bought a live and flip to get my foot in the door with real estate.  I bought a foreclosure and fixed it up my self and added a bed room and bathroom on to the house.  The restaurant I was running shut down due to the pandemic so obviously making the mortgage is something I am now concerned about since the f&B industry is going to take a while to bounce back to where it was.  I was planning on living in the property for at least 2 years because I have two kids and its in a great school district and wanted to avoid heavy tax.  We are now feeling selling and getting out of it now would be our best option since my family can move into an extra space from other family members at a much lower cost and the pandemic is far from over. I am on unemployment since this whole thing has happened as well. SO the question is is there any tax exemptions for a unforeseeable event such as a pandemic?  Would love some input and if there are any professionals out there reading this I would love to know what my options are!

thank all of you for your time and stay safe!

Nathan 

Originally posted by @Nathan Hood :

Hello all,

I am a chef that bought a live and flip to get my foot in the door with real estate.  I bought a foreclosure and fixed it up my self and added a bed room and bathroom on to the house.  The restaurant I was running shut down due to the pandemic so obviously making the mortgage is something I am now concerned about since the f&B industry is going to take a while to bounce back to where it was.  I was planning on living in the property for at least 2 years because I have two kids and its in a great school district and wanted to avoid heavy tax.  We are now feeling selling and getting out of it now would be our best option since my family can move into an extra space from other family members at a much lower cost and the pandemic is far from over. I am on unemployment since this whole thing has happened as well. SO the question is is there any tax exemptions for a unforeseeable event such as a pandemic?  Would love some input and if there are any professionals out there reading this I would love to know what my options are!

thank all of you for your time and stay safe!

Nathan 

How much is the gain? 

You need to take a stand and be able prove that this is unforeseen circumstances. With all the other relief, IRS might be ok with this as well. 
Selling the house because of not being  able to afford alone is not a unforeseen circumstances, but if you take COIVD in to account, you might be able to make a case. 

How comfortable are you defending this? 

@Ashish Acharya the gain is well under 100k.  Obviously not being able to pay it isn't a circumstance. But the reason is literally only because of the pandemic.  Im a little confused on the defending it part.  I have all my documents of losing work directly because of covid and i have the unemployment paper trail, so i am comfortable defending this i would say... 

Selling the house because of not being able to afford alone is not a unforeseen circumstances...

Not sure I agree.  Two of the safe harbors for unforeseen circumstances under the -3 reg are The cessation of employment as a result of which the qualified individual is eligible for unemployment compensation (as defined in section 85(b)) AND 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

OP will want to make sure he meets both the ownership and use test for the property.  If he never moved in it will not be likely he meets the use test and all of this is moot.

And we should note this is only a partial exclusion that may not provide a ton of relief.

Talk to your tax professional to determine if the position is defensible and how to document everything.  Good luck.

@Nathan Hood

Sorry about your job loss.

You never mentioned whether you moved into the property - seems like you have not. If so, then all of this conversation about unforeseen circumstances is pointless, even though I agree with @Eamonn McElroy : you situation should qualify as unforeseen circumstances.

Here's how the exclusion works. If you're married and lived in the property for 2 years, you have up to $500k of your gain tax free. If you lived there less than 2 years, say only 1 year, normally you cannot exclude anything. However, if you moved out of the property after 1 year due to unforeseen circumstances, you do the pro-ration:
     1 year out of 2 years = 50% 
     $500k max x 50% = $250k
so now you can have up to $250k of your gain tax free.

But if you never lived in the property, your ratio is zero days out of 2 years = 0%, resulting in zero exclusion, even with the unforeseen circumstances checked.

Now, some technical stuff for the tax geeks. The above is my interpretation of the somewhat ambiguous language of the law: "...such property has been owned and used..."  I read the "and" as BOTH owned and used at the same time. It could potentially be construed differently, as allowing the ownership period to be counted on its own. I doubt so, but some of my colleagues might feel differently.

You may come across a popular notion of "how would the IRS know that I never moved in"? Especially since you would not even report the sale of the property on your tax return if it is excluded. True, the IRS will not know and probably will never raise the issue. But should they do so, you will be in trouble. I cannot endorse misrepresenting the facts to the IRS, it is illegal.

The good news is that, if you hold this property for longer than 12 months, it should qualify for long-term capital gains treatment. The rate on your gain is likely to be a very reasonable 15%, and it can even be 0%, depending on your total income for this year.

All of the above is generic and based on the limited facts we know. To be sure, always get an advice from your own tax professional.

@Michael Plaks thank you for your response! And sorry for not framing the the question with more information.  It was my primary residence since early January 2019.  We are just packing up and moving due to COVID-19  effect on the f&b industry. I came to all of y’all because I don’t want to cut corners and I figured I would get y’all advice before paying Since there are so many knowledgeable people In this community.   Our plan was always to stay 2+ years it is only because of the pandemic we are selling that’s why I thought it was worth researching. 

Originally posted by @Nathan Hood :

@Michael Plaks thank you for your response! And sorry for not framing the the question with more information.  It was my primary residence since early January 2019.  We are just packing up and moving due to COVID-19  effect on the f&b industry. 

Then you're probably set. You would have 20 out of 24 months - well above what you need for an under $100k gain. I'm still saying probably because there could be other complications we have not uncovered.