Sale of personal residence - twice.

Mar 09, 2012 4 Replies
P

New client, so I'm missing some history.



Taxpayer built home in 1995ish and resided in that home as their primary residence till 2005. Sold home in 2005 to a relative (if that matters) with owner financing, ie: monthly payments to the taxpayer. Relative "defaults" on payments and taxpayer takes back the home and sells it in 2011. Taxpayer did not live in the house since 2005, ie: does not meet the 2 of 5 year rule for the 2011 sale.



I know that you adjust the basis down for the payments received, and that adds to the gain on the house sale in 2011.



The home sale in 2005 was a qualifying sale for the gain exclusion. No problem.



I'm seeing the resale as a taxable event, unless someone knows something that would extend the gain exclusion to the second sale of that home.



Any help on this is appreciated.


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R

Don't you only adjust the starting basis (value home was sold for in 2005) down for only the PRINCIPAL portion of payments received?

I don't see anything.

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P

wrote

Neither do I, but it couldn't hurt to ask.

Thanks,

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L

Paul - something that *might* extend the gain exclusion: There is an answer to your question in IRC Section 1038. You need to read that section, *all* of it; you will find that the answer depends on the *timing* of the repossession and the resale.

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S

One thing occurs to me. You said the taxpayer "took back" the home when the buyer defaulted. How and where exactly did that happen?

In some states when someone defaults the lender doesn't automatically get the property back. Instead it gets sold to the highest bidder, with the lender getting the proceeds to satisfy his debt. Anything received over that amount goes to the buyer.

In that case the sale of the house the second time satisfies the first debt, so should be taxed as received in the first sale.

___ Stu

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