You may qualify for excluding gain from the sale of your home by up to $250k of your capital gains from your taxable income or $500k if you’re filing a joint tax return with your spouse. You must sell your principal residence before you can claim the exclusion. You can exclude gain up to $500k of each home’s capital gain if you own two houses. Publication 523, “Selling Your Home,” provides cost basis rules and worksheets. Topic No. 409, “General Capital Gain and Loss Information,” covers general capital gain and losses information.

Requirements for the Gain Exclusion

To meet the requirements for Section 121 Gain Exclusion, you must satisfy both of the following tests: 

1) you must own and use your principal residence as your main home for at least two out of the five years before the date of sale, and 2) you must exclude any gain from the sale of your other home during the two years preceding the sale of your principal residence. If you meet either test, you may exclude the gain from the sale from your capital gains tax liability calculation. 

To determine whether you meet the ownership requirements, you need to identify the period when you met both tests. For example, if you meet the ownership test during the first three years of owning your home, then you meet the ownership test for the entire five-year period. Similarly, if you meet the use test during the last four years of owning your home before selling it, you meet it for five years.

Reporting the Sale

If you sell real estate, you may need to file a Schedule D (Form 1041) each year’s end. You should also file Form 8949 if you sold any property during the year. Suppose you received a Form 1099-S (Proceeds From Real Estate Transactions). In that case, you must report the sale even if the gain from selling the house is excludable. You must also report the sale if you can’t exclude the entire amount of capital gains from taxable income. To know whether you need to report the sale, see Publication 523.

Suspension of the Five-Year Test Period

An individual is eligible for the suspension of the five-year test if they meet either of the following two conditions:

1) They are on a qualified official extended leave of absence from their position for more than 90 consecutive days.

2) They serve in a capacity that requires them to be absent from their position due to unforeseen circumstances.

At a military base at least 50 miles away from your family or living in government housing. Suppose you live in a dormitory, barracks, or similar quarters while stationed overseas. In that case, you may not be considered a resident of your state or county of your principal residence. You must also meet all other requirements for residency. For example, suppose you’re living in a hotel or motel room. In that case, you might need to stay there for 30 days before qualifying for residency.

Installment Sales

If you sell your house under a contract that provides that part of the selling price will be paid in installments, you must report the sale as an installment sale. You may exclude any gain realized on the sale, but not any loss. See Publication 537, Installments Sales, for more information.

Summary Section 121 Exclusion

• You must sell your primary residence within ten years of buying it.
• You can exclude up to $250K of the gain or $500K if you file a joint return with your spouse.
• You must use the proceeds of the sale to buy another property, such as an investment property.
• You can deduct up to $10K per year for the cost basis related to selling your house.
• You can claim a deduction for state and local sales taxes paid on the sale of your home.
• You can also claim a deduction for mortgage interest paid on the home’s sale.
• You cannot claim a deduction for moving costs.
• You can exclude up to $250,000 ($500,000 for married couples filing jointly) of taxable gain from the sale of your primary residence.
• The exclusion applies to any gain from the sale of a primary residence.
• You’re required to report the sale of your primary residence even if you can exclude some of the gains.
• The suspension applies to spouses who are also military members.
• The exclusion of gain under section 121(b)(3) continues to apply to installment sales regardless of whether the seller uses the installment method to defer the gain.

Need Help With Filing Taxes On Your Property Sale?

There are many different ways to file your tax return. You don’t have to navigate them all by yourself. If you need assistance with your tax return, plenty of resources are available to help you. Some of the most common options include filing online, using an app, or contacting The McGuire Law Firm and speaking to one of our tax attorney professionals. Call us at (720) 833-7705.

The Internal Revenue Service has released the Statistics of Income (SOI) bulletin.  This most recent bulletin discusses tax issues from tax period 2011 and analyzes the increase in high income tax returns, as well as other tax trends such as foreign earned income by individuals.  The SOI bulletin is quarterly.

Notes from the Spring SOI bulletin include:

–          For the 2011 tax year, of which 1040s would have been due April 15, 2012, taxpayer’s filed 145 million 1040s and about 63% were taxable returns, meaning the tax return showed a total income tax greater than $0.  This percentage is the third lowest percentage in the last 25 years.

–          Total adjusted gross income on these taxable returns totaled $7.69 trillion in the year 2011 and total income tax was $1.05 trillion.

–          The average tax rate in 2011 increased .5 percentage points to 13.6

–          When looking at alternative minimum tax issues (AMT) the number of tax returns subject to AMT increased by approximately 200,000 returns.

–          4.7 million 1040 individual income tax returns had an adjusted gross income of $200,000 or greater, which could be a threshold regarding high income tax returns.  This amount was 3.2% of tax returns filed for the tax period.

–          If looking at expanded income as opposed to adjusted gross income, the number of high income tax returns would be higher at approximately 4.8 million returns.

–          $38.7 billion was reported in charitable deductions, with large organizations receiving the majority of donations followed by foundations.

–          $43.6 billion was reported in noncash charitable contributions.

–          In 2011, 450,000 United States taxpayers living abroad reported $54.2 billion of foreign earned income.  Salaries and wages compose over 76% of this figure.  $28.3 billion was claimed as foreign income excluded from tax.  Of all the taxpayers claiming foreign earned income on their 2011 1040 tax return, over 60% of these taxpayers had no United States tax income liability in 2011.  $16.5 billion was claimed in foreign tax credit on about 6.9 million tax returns.

At tax attorney at The McGuire Law Firm can assist you with your tax questions and issues.  The McGuire Law Firm works with both individual and business taxpayers from tax planning & tax analysis to resolving IRS problems and disputes.  Call to schedule a free consultation with a tax attorney!

A Denver tax attorney at The McGuire Law Firm can assist your corporation regarding corporate issues such as earnings & profits, and what this term means to their business.  A tax attorney can help individual business owners regarding certain transactions of which the corporate earnings & profits will play a role.  Below is an article related to corporate earnings & profits that we hope you find useful.

From a tax perspective a corporation’s earnings & profits (E&P) do not impact the corporation’s tax liability.  Thus, why is the E&P of a corporation important, and what impact does such amount of figure have on the corporation?  The reason corporate E&P is so important is because a corporation’s E&P is used to calculate how distributions to shareholders of the corporation are taxed.  Corporate distributions are included in a shareholder’s gross income for individual income tax purposes to the extent the distribution constitutes a dividend under IRC Section 301.  Internal Revenue Code (IRC) Section 316 defines a dividend as any distribution of property from a corporation to the corporation’s shareholders out of E&P.

Corporate distributions are first treated as a dividend to the extent of the corporation’s E&P.  Thereafter, the distributions are treated as a return of capital to the shareholder(s), and thereafter capital gain to the shareholders.  Thus, a corporation’s E&P really appears to be a measure of the corporation’s ability to make distributions to the corporate shareholders without returning the shareholder’s capital contribution or other investor investments. This means a corporation’s E&P is a measure that represents a corporation’s ability to make distributions to shareholder’s without disrupting the shareholder(s) basis in their capital investment.

There is no black and white rule, method, statute or law for a corporation to follow when calculating E&P.  Due to the important role E&P plays in characterizing corporate distributions as dividends, the allocation of E&P in tax free corporate distributions such as reorganizations are important considerations when corporations consider such transactions and reorganizations.  IRC Section 381 deals with the carryover of corporate E&P.  For example, what occurs when one corporation with an E&P deficit is acquired by a corporation with accumulated E&P?  The IRS has issued regulations section 1.312-10 to address these issues, which will not be discussed in this article.

Under IRC Section 302 certain corporate distributions may not be treated as dividends and thus be given sale or exchange treatment to the taxpayer.  These transactions are primarily based on the overall impact to the shareholder’s ownership in the corporation after the transaction has been completed.  If a shareholder’s corporate ownership has been reduced or diminished enough, the distribution to the shareholder can be afforded sale or exchange treatment.  If the shareholder, after the transaction no longer holds any stock and has completely liquidated their interest, the transaction may be afforded sale or exchange treatment.  Certain transactions may also be considered partial liquidations and thus receive sale or exchange treatment.

Corporations with questions regarding their E&P, or considering distributions of property should consult with their CPA and/or their tax attorney and business attorney to discuss the tax implications to the corporation and shareholder. A Denver tax attorney or business attorney at The McGuire Law Firm would welcome the opportunity to discuss such tax matters and issues with any business owner.

You can schedule free consultation with a Denver tax attorney or international tax attorney by contacting The McGuire Law Firm.  720-833-7705 or John@jmtaxlaw.com

Offices in Denver, Colorado and Golden, Colorado.

 1) If you are being audited by the IRS or owe taxes to the IRS, you should contact a tax attorney.  An experienced tax attorney can represent you before the IRS and often prevent enforcement action such as bank levies, asset seizures and wage garnishments.  Further, your tax attorney can help you resolve the tax issue, as well as help educate you to hopefully prevent the issues from occurring in the future.  John McGuire is an experienced Denver tax attorney at The McGuire Law Firm and has successfully represented hundreds to thousands of businesses and individuals before the IRS.

2) If you are starting a business, a tax attorney can educate you on the tax issues and implications regarding the taxation of different business entities, and tax affects to the business owners.  Further, if your business will have employees, a tax attorney can help you understand your requirements regarding withholding taxes, 941 returns and federal tax deposits. A Denver tax attorney can assist you with the formation of your businesses and in understanding your tax responsibilities.

3) If you are considering gifting or transferring property to loved ones or other parties, a tax attorney can help draft the necessary documents and advise you regarding the federal tax implications.  A tax attorney will often work with clients regarding the advantages of gifting within their estate plan and execute these gifting strategies within the estate planning documents.

4) Your considering buying a rental property, but do not understand depreciation and how the rental property will impact your individual income tax return.  A tax attorney can help you understand these issues and thus allow you to take full benefit of the federal tax code and likely reduce your personal income tax.  A Denver tax attorney at The McGuire Law Firm can outline the tax implications and issues to consider when purchasing rental properties, in addition to other issues such as liability.

5) You have not filed tax returns in a while and are scared of the IRS.  Call a tax attorney immediately.  The longer you wait, the worse the situation will become.  A Denver tax attorney or international tax attorney at The McGuire Law Firm can contact the IRS on your behalf, obtain information & transcripts and help you prepare and file returns with the IRS.  If the tax returns once filed result in a tax debt, we can help you resolve your IRS debt with an offer in compromise, installment agreement or other resolution option.

Call us at 720-833-7705 to speak with a Denver tax attorney or international tax attorney and schedule your free consultation.