IRS Closes Tax Loophole for Homeowners

For a brief period of time, the capital gains tax rule that went into effect last January favored high-end homeowners in an unexpected way.

The new rule, which permits special lower capital gains rates for property acquired after January 1, 2001 and held for at least five years, offers an opportunity for people who owned property on January 1, 2001 to treat the property as if was sold on that date and restart the capital gains clock. This deemed sale would occur on the tax return only - the owner of the capital gains property would never relinquish actual ownership of the property.

The potential tax effect of this rule for a homeowner facing a taxable gain on the sale of a personal residence that exceeds the $250,000 exemption, and for a married couple whose gain exceeds the joint $500,000 exemption, is that it appeared it was possible for the deemed sale to apply to a home, the owner could take advantage of the exemption that applies to gains on home sales, then a new exemption would apply when the home is finally sold, more than five years later.

To make things perfectly clear, the IRS has closed this loophole, now spelling out the fact that, although taxpayers are entitled to use the deemed sale with personal residences, the $250,000/$500,000 exemption on the sale of a personal residence does not apply in the case of the deemed sale.

Taxpayers who intended to exercise the option to use a deemed sale on their residence on their 2001 tax return, report the deemed sale of the home and take advantage of the exemption on the gain, may want to revisit this issue before filing their 2001 tax return next spring.

You may like these other stories...

The IRS requires most freelancers and other self-employed individuals to use the cash method of accounting, under which income isn't counted until cash, a check, or an e-payment is received, and expenses aren't...
Ernst & Young 2013 audit deficiency rate 49%, regulators sayMichael Rapoport of the Wall Street Journal reported on Thursday that the Public Company Accounting Oversight Board (PCAOB) found deficiencies in 28 of the...
Some of your clients may get away to business conventions from time to time. It gives them a chance to rub shoulders with colleagues, catch up on the latest developments, and fine-tune their skills. And, when the meetings or...

Already a member? log in here.

Upcoming CPE Webinars

Sep 9
In this session we'll discuss the types of technologies and their uses in a small accounting firm office.
Sep 10
Transfer your knowledge and experience to prepare your team for the challenges and opportunities of an accounting career.
Sep 11
This webcast will include discussions of commonly-applicable Clarified Auditing Standards for audits of non-public, non-governmental entities.
Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.