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tax time and the sale of principal residence


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Someone must have had this experience and can give us some guidance.....We retired in 1999 from a NW state where we owned a home and begin a lifestyle of snowbirds and traveling most of the year.........7 to 8 months of the year living in our RV. While keeping our home......we moved our domicile to SD in 2002....... but like most, we didn't have any real estate in SD. We maintained our home in our original NW domicile state and spend 4 to 5 months there each summer. It was our only home (brick and mortar home) for 13 years since retirement. We sold that home this past fall (2014) and purchased a retirement home in a southwest state while maintaining our domicile in SD. We watch closely not to spend more than 180 days in any state that might conflict our domicile of SD.

 

Now is tax time and from what we can read, the NW home had been our only residence for those 13 years since retirement....."primary or principle residence" and should be exempt from capital gains. But.....the CPA is saying that "principle residence" must be in your state of domicile (SD) and will be denied by the IRS. We can't find that clarification anywhere in documents we can find on the subject. The CPA is saying that "principle residence" and the exemption from capital gains must occur in your current state of domicile.......anyone with any experience with this.

 

I may not have explained this too well but any help would be appreciated.

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Did you register to vote in SD? You obviously had a drivers license and licensed your vehicle(s) there, all of which go to help establish your domicile. And you filed your income tax listing SD as your domicile for the past 13 years? Sure sounds like you established with the IRS that SD was your domicile

 

In their publication (Publication 523) the Main Test that the IRS uses:

 

Main Home

If you own or live in more than one home, the test for determining which one is your main home is a “facts and circumstances” test.

The most important factor is where you spend the most time. However, other factors can enter the picture as well. The more of these that are true of a home, the more likely it is your main home:

The address listed on your:

  1. U.S. Postal Service address,

  2. Voter Registration Card,

  3. Federal and state tax returns, and

  4. Driver's license or car registration.

The home is near:

  1. Where you work,

  2. Where you bank,

  3. The residence of one or more family members, and

  4. Recreational clubs or religious organizations of which you are a member.

And then there is:

 

Eligibility Step 3—Residence

Determine whether you meet the residence requirement. If your home was your residence for at least 24 of the months you owned the home during the 5 years lead- ing up to the date of sale, you meet the residence require- ment. The 24 months of residence can fall anywhere within the 5-year period. It doesn't even have to be a sin- gle block of time. All you need is a total of 24 months (730 days) of residence during the 5-year period.

If you were ever away from home, you need to determine whether that counts as time living at home or not. A vacation or other short absence counts as time you lived at home (even if you rented out your home while you were gone).

------

 

Depending upon how much tax would be due, you might want to talk to a good tax lawyer, not a CPA.

 

Barb

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I agree with your CPA, its going to be hard to convince the IRS that your primary home state was the NW one, when you've been claiming SD was your primary home state for 13 yrs. It would have helped if you moved back to the NW state before selling that home. You can't have your principal home in state X and your domicile in state Y at the same time. Your domicile is your principal home state, whether you live in an RV, tent, home or condo; and whether you own 1 or 6 homes in other states is irrelevant if you aren't living in those homes. as soon as you start using one of those other homes as your primary, then your domicile changes to that state.

Find a good tax lawyer if you disagree, because if you convince the IRS that your real home state was the NW one, then that state will want their taxes for the last 13 yrs that you falsely claimed SD was your home state.

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The 24 months of residence can fall anywhere within the 5-year period. It doesn't even have to be a sin- gle block of time. All you need is a total of 24 months (730 days) of residence during the 5-year period.

Can you establish from credit card statements or canceled checks that you spent the required number of days or months in your home over the last 5 years? If so then that might work.

 

You can also consider the tax savings you got from not paying the WA taxes as off setting any taxes you will have to pay on the sale of the house.

 

Don't forget you will only pay taxes on the "profit", not the sales price. Can you deduct any improvements from the profit? Also the sales commission and other sales expenses should be deductible. Also it will be capital gains tax, and long term as well. I think that is taxed at lower rates than other income.

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Barb's reference to IRS Publication 523 is right on. The law clearly states that the house must have been your principle residence for 2 of the preceding 5 years in order to qualify for this exemption. Since 2002 you have told the state where your home was that you were residents of SD. If any of this issue with the IRS should be shared with the state where that house was sold, you could also find them coming after you for state income taxes for the years that you claimed to domicile in SD. The law says that you may only have one domicile and that is what most taxes are based upon.

 

This is an excellent example of the reason that I often advice people to think carefully when changing domicile and in their choice of domicile. My guess is that you changed domicile in order to avoid state taxes and did so successfully but now you experience the other side of things. Since you have filed your income taxes as having a SD domicile for 13 years it is highly unlikely that you can now use the principal residence exemption from a different state without notice from the IRS. The vast majority of IRS audits today are caused by an alert from the computer processing of returns and this will have a major data mismatch in that there are two different states of domicile and it is probably a fairly substantial amount of money. That combination is exactly what their computers monitor.

 

While it would not harm anything to get a second opinion from another accountant, you must realize that your present accountant is an IRS registered agent and he will not file a return that violates the law because of penalties that he would be liable for if caught. You probably won't find others willing to do that either so you will be on your own in filing that way. I would also suggest you get legal advice to see what the penalty is if caught in determining whether or not to take the risk.

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