Accountants what does the IRS consider primary home

[look 171]

I have a home that I own half a block up the street. It was purchased as a flip. Now that's done, I really like to just let it sit for another 9 months (making it two years of ownership) so I don't have to get hit with capital gain tax. Can I call it my primary home. Sq footage is larger then our current home. All the utilities are in our names. Will I have much explaining to do if I go that route. It can be something like 50-60K difference in next years income tax. Any advice is welcome because my trusty accountant just retired 6 months ago. My heart skipped a beat when I found out.

Jeff

[jwasbury]

Technically, its supposed to be used as your primary home. Not sure how the IRS would ask you to support the assertion upon audit. See IRS Publication 523 - Selling Your Home. It should provide criteria IRS considers to determine what is a primary residence. Sounds like its not if you want to "call" it your primary home...so it appears that you want to play audit lottery. What address have you used as your primary on your Form 1040? If you want to pass off this speculative investment as your primary residence, I would start there.

[drcoastline]

I think Jwasbury is correct, it is audit lottery from what you have stated. I am not an accountant but I have bought, sold personally and as a broker more than a few pieces of real estate.

Remember it is on you to prove it is your "primary" not on the IRS to prove it isn't. You could pass it off if you moved everything to that address. Have your mail sent there, file taxes from there, have utility bills and insurance that support the property is your primary. If you get audited and and all your mail is being sent to your other address, the utility bills show basic usage for the prior two years you are screwed. So if you want to use it switch everything now and wait 24 months.

[svandamme]

How fast do you think it will sell? Can you put it on the market, but hold off writing the sale at the notary till you hit 2 years ownership if you sort of make a deal with the future owner (deposite, some incentive+ short term rental agreement for free)? If it's next years income tax, you wouldn't be audited about it this year about it? Note, i know nothing bout us taxes or real estate procedures.

[ErVikingo]

Supposed to be used as your primary home. I have seen agents consider this based on whether you/your family spent over 180-days/year on it and others based on whether you report it as your home address on employment and/or bank records.

Down here, if its registered as your "homestead" for purposes of the property tax exemption.

(I don't do taxes but I'm a CPA)

[Zeke]

The 180 days (or 183) sounds correct. But, I think it's more how you treated your "2nd " home. You can rent your 2nd home 14 days a year and not declare income. Did you? The utility bills need to show full time usage. It's things like that.

What reason would you have owning 2 houses on the same street? Why would you move to another and move back in 2 years? That would be pretty suspicious. How are you treating all the supplies purchased to repair it?

Documentation is key .

[Esel Mann]

One can claim anything on their tax returns. That is until one gets audited at which time there had better be documentation to back the claims up!

If I recall the rule correctly, and please do double check this, it needs to be 2 continuous years of the past 5 years where the house was your primary residence in order to get the capital gains waived.

To waive the capital gains, and have a leg to stand on with the IRS, for those 2 continuous years there needs to be supporting documentation that it was/is your primary residence. 9-months of proof ain't going to cut it if you get audited.

Examples of proof:
Voter registration
Drivers license
Car registration
Insurance cards/statements with the address
Utility bills
Property tax exemption
Bank statements with the address
IRS returns files with the address
Hustler magazine subscription to the address

Since you are 9-months out perhaps consider changing your primary residence now to the address and holding on to it for another 1.25 years to make 2 years. As far as selling it, waiting the additional time will only help the sale price.

Now I do not know what your plans are for selling it now, however one other possible option to avoiding capital gains tax is to sell it and trade up. Double check me on this, but if I recall correctly, if you sell house A, do not directly receive the monies (have it held in escrow) and then buy house B which can be considered a step up, you do not pay any capital gains tax on the profit from the sale of house A.

[Esel Mann]

Originally Posted by Zeke

What reason would you have owning 2 houses on the same street? Why would you move to another and move back in 2 years? That would be pretty suspicious. How are you treating all the supplies purchased to repair it?

Zeke, I am actually in a similar situation. I bought house A, then a year and a half later I bought house B two doors over on the same street. I did it as house B was a good price and since housing prices were upward I kept house A. I moved into house B and lived there for 3 years and then moved back to house A for 2 years. I was going to unload both but then, well there was that little matter of the housing market collapse.

There is nothing suspicious about it. Simply folks making use of the tax code is all. As you said the key is to have the supporting documentation. While the situation is not typical, nevertheless there are no rules being broken.

[recycled sixtie]

Well first of all you must make a decision that u can live with so u can sleep at night.
My daughter calls me I am too honest but if it was me I would do the following:

See if your retired accountant can give u some advice on this matter. Pay him for that. If unable, get a reference from him on who could replace his obvious ability.
It is essential that you find somebody to give u the right advice. If you make $$$ on this, then it is normal to pay taxes on your profit. If you do anything underhanded, then u may have IRS knocking on your door. I do my own taxes and have done for years but will get advice if I need it. The last thing I want is to be audited and it is the last thing you want I am sure.

[john70t]

Originally Posted by jwasbury

Not sure how the IRS would ask you to support the assertion upon audit.

Primary mail and ultilities address, vehicles parked, conversations with neighbors, cell phone location at night, energy usage, credit card transactions, parking tickets, etc, etc....

There's always a growing trail of information.
Dumb crooks get caught. Smart ones have to work hard. Some make a lot of taxpayer money and are protected by politics.

Being honest is the best policy.

If it is financially worthwhile to obtain one single deduction, you'll have to alter your lifestyle.
Else, get income and deductions now and offset the taxes.

[Scooter]

jwasbury hit the nail on the head with IRS Publication 523: Publication 523 (2011), Selling Your Home

[Zeke]

You don't get any gains waived. You are able to roll the gains into a new house. You have 2 years to reinvest.

I would move into that other house then sell both after 2 legitimate years and roll all the money into a 3rd. You can also do an exchange and I don't remember any time limits on how long you've had your property prior to the exchange. You have 45 days to designate your target property once you sign off on the title.

There are pools of property for this very process.

[BK911]

I thought you had to own it for 5 and live in it for 2. Anything less is prorated.

[jwasbury]

Originally Posted by Zeke

You don't get any gains waived. You are able to roll the gains into a new house. You have 2 years to reinvest.

Current rules most definitely allow for exclusion of gain as opposed to deferral. On sale of a primary residence you are able to exclude gains up to $500k for married taxpayers filing jointly. The rolling gain into a new house was the old rules for sales of primary residence.

This is one of the very few "freebies" in the tax code and I think there is little doubt that it helped spur the recent real-estate bubble along with low interest rates and abundant mortgage financing.

Exchange of like-kind property (a/k/a 1031 exchange, named after applicable Internal Revenue Code section) is typically used for property used in business (including rental real estate), or held for investment purposes. In a 1031 exchange, gain on the property sold is rolled into the adjusted basis of the newly acquired property.

[MRM]

It's easy to check if it's your primary residence because you get a break on your state property taxes for your primary residence. It's pretty risky claiming to the IRS that a property is your primary residence when your homestead tax credit with the state is a different house. If you deduct your state property taxes on both properties and the tax on your real primary residence is less than the other one, it might occur to the IRS to check which one is listed with your state as being your homestead for state tax purposes.

[doug_porsche]

From what I have heard; It depends if you use Newt Gingrich's tax guy (Newt paid 31+% in 2010) or used Mitt Romney's tax guy (Mitt paid 13+% in 2010).

Sorry, could not resist

[look 171]

Originally Posted by john70t

Primary mail and ultilities address, vehicles parked, conversations with neighbors, cell phone location at night, energy usage, credit card transactions, parking tickets, etc, etc....

There's always a growing trail of information.
Dumb crooks get caught. Smart ones have to work hard. Some make a lot of taxpayer money and are protected by politics.

Being honest is the best policy.

If it is financially worthwhile to obtain one single deduction, you'll have to alter your lifestyle.
Else, get income and deductions now and offset the taxes.

I am not being dishonest John. I am just looking for ways to not have to pay a huge amount of tax. they make the rules, I try to stick by them and use whatever loophole I can to stay out of jail. If it means shifting a few paper work and billing address, It might be worth doing.

I have a client who buy houses. Out of those , he takes one and spends 6 months to remodel it then holds on to it for just about 2 years and dumps it on the market. His real resident is elsewhere, but no one ever lives in the house he plans to sell. I know he claims his resident under that particular house he plans to flip. He gets his 250k tax free cap. gain. He made A LOT of money during the good years in real estate.

Keep em coming, thanks

[ben parrish]

Gains are excluded...no need to reinvest. As long as you dont make over $250,000.00 for a single...$500,000.00 for a couple. Use that a few times over the last ten years.

[Zeke]

Originally Posted by jwasbury

Current rules most definitely allow for exclusion of gain as opposed to deferral. On sale of a primary residence you are able to exclude gains up to $500k for married taxpayers filing jointly.

Every 2 years it seems. Used to be one time. As I read it, one still has to have lived in the home 2 years out of the last five and not necessarily continuous.

I wonder how the roll over rules go now? Buy another within the 2 year period and roll the profit into the new purchase? That's how it was.

I like this from Wiki:
"One strategy that is sometimes employed is for a homeowner to move out of the primary residence, rent it out for a period of time, evict the renters, exchange for a new house, rent the new house out, evict the new renters, and then move into the new house, thereby avoiding capital gains tax.[7] 1031 exchange can also be used to avoid capital gains by renting out part of your principal residence.[8]"

Capital gains tax in the United States - Wikipedia, the free encyclopedia

[jwasbury]

Originally Posted by look 171

I am not being dishonest John. I am just looking for ways to not have to pay a huge amount of tax. they make the rules, I try to stick by them and use whatever loophole I can to stay out of jail. If it means shifting a few paper work and billing address, It might be worth doing.

I have a client who buy houses. Out of those , he takes one and spends 6 months to remodel it then holds on to it for just about 2 years and dumps it on the market. His real resident is elsewhere, but no one ever lives in the house he plans to sell. I know he claims his resident under that particular house he plans to flip. He gets his 250k tax free cap. gain. He made A LOT of money during the good years in real estate.

Keep em coming, thanks

Sorry, but if you don't actually live in the house and USE it as your primary residence, but claim it as such and take the gain exclusion, you ARE being dishonest. Shifting the paperwork around to give the appearance that it is a primary residence may be enough to satisfy an audit inquiry, but it doesn't change the facts. The loophole here for you, if you truly wish to be honest and play by the rules is to actually USE the house you plan to claim the gain exclusion on.

Your client who takes the gain exclusion on properties that he doesn't actually use is committing tax fraud, plain and simple. Statute of limitations for IRS to audit is normally 3 years after the return is filed but is extended to 6 years in cases where a taxpayer has omitted 25% or more of gross income. The statute of limitations doesn't apply at all in cases of fraud with intent to evade tax.