Hi Bill!

"Bill" <rbu1[at]verizon.net> wrote:

- quote -

OK, lets go through here and pick out the important items:

- quote -

So far, the basis is $136,000.

- quote -

Now, that's $20,300. worth of improvements. Add that to your basis, and you
now have $156,300.

To that total, you can add the costs of sale and closing (like real estate
agent fees, title company fees, and others), which if you used a selling
agent are probably $10,000. to $15,000. This total can be added to your
basis. So you are likely around $170,000.

You will pay tax on the difference between the $185,000. sale price and your
basis, likely around $15,000. in your case.

So, what are you paying tax on, anyway?

- quote -

While you did only get about $9000. at the closing, you also paid off debts
and made the down payment on the new house.

- quote -

So the tax is on $185,000. less your basis, which is calculated as above.
You might need to add or subtract an item or two before you get there, but
it will be a smaller amount than you are imagining. Also, if you are in the
28% tax bracket (and it IS lower than that now), you will pay 15% tax on
your capital gains. So your tax bill is closer to $2000 - $3000.

Good luck!

Bryan

--
-------- Bryan Kellar, EA
Oregon Tax Help, Inc. Portland, Oregon
www.oregontaxhelp.com
www.canadatax.org

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"Bill" <rbu1[at]verizon.netwrites:

- quote -

Beats me. There was too much who shot John? in the post for me to pull out the
relevant numbers on only one cup of coffee.

Financing has NOTHING to do with your taxable gain, so lose all those numbers.
Yes, I know that affects what you walk away from the table with, but that
figure isn't relevent to your tax liability either.

Your gain is sale price minus expenses of sale and adjusted basis. Adjusted
basis is your purchase price plus capital improvements. See IRS Publications
550 and 551.

Phil Marti
Topeka, KS

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"Bill" <rbu1[at]verizon.net> wrote:

- quote -

If you are trying to justify your move as an "unforseen
circumstance" and claim a prorated exclusion amount for the
gain, I think you need to build a stronger argument than
this.

- quote -

None of the above information about your loans is RELEVANT
to any determination of cost basis or gain on the sale of
the old residence.

- quote -

As indicated above, what cash you received at settlement is
IRRELEVANT to the taxability of your gain.

- quote -

Capital improvement items, which these seem to be, are ADDED
to your purchase price to arrive at your "adjusted cost
basis". It sounds like you did not do this. According to
your numbers (which should be documented) your adjusted
basis is really $136,000 + 20,300 = 156,300

- quote -

Seems like you MADE MONEY on the sale, so how is this a
"pretty good loss"?

- quote -

And, those items should be added to your purchase price. Any
commissions you paid at settlement are subtracted from your
selling price, further reducing taxable gain.

If I have to pay 28% on the difference
- quote -

Long term capital gains (over 1 year holding period) are
currently maxed at 15%. Based on the figures given, your
gain is no more than $190,000 - $156,300 = $33,700. The tax
would be $5,055 or less.

- quote -

Don't worry, they will find you. Why would you need a
payment plan? You made money on the deal. The fact that you
had all those loans (unpaid) is not the IRS's fault.

- quote -

You had a gain, have no basis for an exclusion, so YES. Duh.

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first of all, how much did these additions add to the basis
of the house?

second of all, you might have done something a little shady
when you had the buyer get back money at settlement.

Carol
What can one expect of a day that begins with getting out of bed.

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Bill wrote:

- quote -

Well, the question is going be whether the developments
weren't foreseeable at the time you bought the house, and
how persuasive you are with the IRS agent if examined. Your
reason doesn't *sound* terribly promising right now (it's
too much like the example in the regulations about not being
able to tolerate the traffic which the IRS holds is *NOT* an
unforeseen circumstance) but it's possible that other facts
might salvage it.

For example--if a month after you bought the property, a
person moved in next door to you and began running a crystal
meth lab, that would be a "good" set of facts (well, OK not
good in other ways, but for this purpose it's good). But if
you are just uncomfortable with the general level of crime
in the area, but it hasn't changed since you purchased the
residence you have more problems. That is, if the problem
*could* have been discovered, but you simply failed to do
so, the IRS example suggests it's tough luck.

Your phrasing that you "thought" it was safe when you moved
in suggests more the latter case--the problem existed when
you purchased, you simply didn't uncover it for whatever
reason. It's much better, given the way the regulation is
written, to be able to point to discrete events that
occurred *after* you occupied the residence that changed the
situation.

- quote -

That $20,000 doesn't create any additional "cost" in the
house. You merely took debt from one pile (unsecured) and
moved it to another (secured). Unfortunately, that also
meant that when you sold the security the debt would have to
be repaid.

- quote -

Again, no additional basis here--you've just gone into debt
by pledging an asset and putting the funds into a new asset.
When the asset securing the note is sold, you have to repay
it.

So where you stand at this point is that you have put
$20,000 you didn't really have into a new asset, and still
have the original $20,000 of debt that has now been
converted into a type that will need to be repaid if you
sell the house.

What you've done is simply issued IOU's to lenders that say
they get their money when you sell the old house, rather
than being able to pocket it. But you've put absolutely
nothing into that old house, so you are still selling the
asset that you have only paid $136,000 for.

- quote -

I won't dig too deeply there, but will say that at least
this is arguably either basis or a reduction of sales price.
There may be a *lot* of other issues with this transaction
depending on *why* it was done (especially if you conspired
to mislead the lender into believing the buyer has more
equity than he/she really does), but I'll ignore those and
assume this payment is otherwise legal (if not, there may be
public policy issues that could deny the deduction).

- quote -

All of those items would add to the basis of the house, and
would reduce your gain. But the cash you got *out* of the
sale isn't relevant--you simply gave others the right to
take the proceeds in exchange for giving you cash earlier to
either pay off debts or buy another asset.

- quote -

Well, first thing--the maximum long term capital gain rate
is 15%, so if you held it for more than one year (and the
date is going to matter), it may not cost you as much as you
fear. Of course, if you didn't hold it that long then you
have the ordinary tax rates.

However, the additions you noted above would add another
$20,300 to your cost basis, and it appears you "really" sold
the house for $185,000--so I compute your gain as $28,700.
Still a gain, but not as much as you had computed.

Now, that said, you should have consulted with a tax
professional *before* the sale, not after. First, if you
did manage to sell just before a year was up, you may have
cost yourself money that could have easily been saved by
delaying the closing just slightly. Second, the professional
could have helped you determine if your sale was likely to
qualify for one of the exceptions under Section 121. Third,
even if it was determined you couldn't get out of the tax if
you sold, you would have learned about how long you would
have to "stay put" to get the exclusion--and then it would
have been your decision if you could "hang on" for the two
years.

Finally, even if you had decided you couldn't hang on and
had to move now, you would have known that borrowing against
your current property was going to put you in a world of
hurt cash flow wise and that might have caused you to look
for a different solution (a different lender and/or a
different property).

But, back to your situation--yes, if you can't pay right now
but you could manage an installment agreement, you likely
could get one of those from the IRS next April. However, be
aware that such agreements come with "strings" and you need
to be sure you can live up to the agreement. Also, if
applicable, don't forget to include state income taxes in
your calculation.

But if you have long term gains and the state tax isn't too
high, the $9,000 *should* cover it--assuming you still have
that $9K available to use on taxes.

--
Ed Zollars, CPA
Phoenix, Arizona

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There were a couple reasons we moved the first being the
neighborhood. We thought when we moved in it was safe. A
couple things happened in the short time, 1 year 8 months to
be exact, we were there that made my wife feel unsafe.

Well this is the part I do not understand. We bought the
house in May 2002 for 136,000. I guess about a year later
we got a home equity loan for 20,000 to pay off some debt.
A couple months after that we refinance again so I was back
to having one mortgage now for 156,000. When my wife
decided she wanted to move the builder for the new home
required 20,000 dollars down. With out the sale of our
present home we could not do that. The builders mortgage
company recommended I get a home equity line of credit for
20,000 to use on my down payments. That's what we did. So
come settlement time on the old house we agreed upon a sale
price of 185,000. The buyer needed money so we did 190,00
for them so they could get 5000 back at settlement. So at
settlement I walked away with a measly 9000 after the
mortgage and the equity line of credit were paid for. That
9000 dollars does not even cover all the money I put in to
the old house. I had a really nice deck put on that cost me
6000, we had a hot tub sunk in to the deck that cost me 7000
not to mention the shed 1300 the fence 4000, and the
sprinkler system 2000. I took a pretty good loss on this
house if you look at all the numbers AT a quick look just
the stuff I listed totals over 20,000 in stuff I put in to
that old house. If I have to pay 28% on the difference
between 136,000 and 190,000 I am going to be in trouble
that's over 15,000. Uncle Sam is going to have to hunt me
down or make me some kind of payment plan BILL

Do I have to pay capital gains?

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