Question

Cap gain on sale of primary residence

Forum|Forum|5 years ago
July 5, 2020
1 reply
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I owned a house and an adjacent unimproved lot and lived there for 45 years. Sold the lot in Sept 2019 and the house in March 2020. The gain on both combined was well under the $500,00 limit for joint filers. According to IRS the lot can be considered part of residence and is eligible for cap gain exclusion just like the house if both are sold within 2 yrs of each other. But they must be treated as a single transaction for tax purposes (according to pub 523). A 1099-S was sent to IRS for the lot because I answered a certification form question wrong but none was for house. How do I claim them as a single transaction for tax purposes when they occurred in two different years?

A

Anonymous

from irs regulations 1.121-1

(A) Maximum limitation amount. For purposes of section 121(b)(1) and (2) (relating to the maximum limitation amount of the section 121 exclusion), the sale or exchange of the dwelling unit and the vacant land are treated as one sale or exchange. Therefore, only one maximum limitation amount of $250,000 ($500,000 for certain joint returns) applies to the combined sales or exchanges of vacant land and the dwelling unit. In applying the maximum limitation amount to sales or exchanges that occur in different taxable years, gain from the sale or exchange of the dwelling unit, up to the maximum limitation amount under section 121(b)(1) or (2), is excluded first and each spouse is treated as excluding one-half of the gain from a sale or exchange to which section 121(b)(2)(A) and § 1.121-2(a)(3)(i) (relating to the limitation for certain joint returns) apply.

what is being said is that you get 1 exclusion for both properties. you report the land sale in the year sold excluding the gain up to the max exclusion and then report the home sale in the year sold and use the remainder of the exclusion.

and I'm sure you know that for the vacant land to qualify for the exclusion the taxpayer used the vacant land as part of his principal residence;

R

RLAAuthor

Thanks for prompt response.

When entering the sale in Turbo Tax it asks if I have taken an exclusion within the past 2 years and if I have it says I can't take another. If I say no this year when I put in the land sale I'll have to say yes next year when I try to enter the house sale. I tried this by telling TTax I sold the house in 2019 and that I had taken an exclusion in 2018. TTax then told me I didn't qualify. Is there something I'm missing in TTax?

Alternately, since there was no 1099-S for the house, according to IRS rules, I shouldn't have to ever report it all. What if I took an exclusion for the lot now in 2019 and then didn't report the house sale at all on next year's taxes? Would that be an appropriate way to handle it? Since both properties together fit well within the dollar limit and do, in fact, both qualify for the exclusion this would produce a fair result but I don't know if it would be the best, or even a good, way to do it. Is there a better way? And yes, by the way, the lot was used only for personal use and as an extension of our yard.