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Copyright © 1995-2013 Robert L. Sommers, All rights reserved.
November 2001   < "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Tax Prophet
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  Pro-Rating the Residency Exclusion.
  Partial Gift of Inheritance
  Renting a Residence and the Impact on the Residence Exclusion
  Deducting Attorney's Fees
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We are two men intending to sell our residence after owning it for 18 months. Are each of us entitled to a $250,000 capital gains exclusion, or is it $250,000 for the sale? Secondly, are we entitled to the exclusion if we sell before owning it for 24 months? < "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Tax Prophet
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First, you need to own and live in the home as your principal residence for at least 24 of the 50-month period prior to sale to qualify for the capital gains exclusion. If you meet this threshold test, then each of you is entitled to a $250,000 exemption. If you sell your home prior to meeting the 24-month test, then you are not entitled to any exclusion unless the sale was due to unforeseen circumstances, such as a job change. In other words, you cannot just prorate the exclusion if you sell prior to meeting the 24-month requirement. If you sell prior to 24-months due to unforeseen circumstances, then you prorate the exclusion using the number of months meeting the exclusion requirements as the numerator and 24 as the denominator multiplied by the exclusion amount. For example, if you owned and lived in the residence for 18 months, then 18/24 x $250,000 = $187,500 exclusion each. < "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Tax Prophet
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The Tax Prophet's Section entitled Tax Class/Real Estate/Principal Residence < "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Tax Prophet
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My sister and I are beneficiaries of a will. We agreed to a different distribution than what is stated in the will in that we want to include the wife of our deceased brother. Who is responsible for the taxes? < "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Tax Prophet
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If you and your sister are entitled to the distribution and decide to transfer a portion to a third party, you are making a gift to that person and you will be responsible for the gift-tax consequences. For instance, if you and your sister each transfer $25,000 to the third party, each of you has made a $25,000 gift. Your annual gift-tax exclusion is $10,000 per donee (the recipient), but if you are married and your spouse consents to the gift, the exclusion is $20,000 per year. < "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Tax Prophet
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The Tax Prophet's Section on Estate Planning and Gifts < "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Tax Prophet
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We may be moving to Europe for a year or more and would like to rent our house while we are away. Does it impact our ability to take advantage of the $500,000 (for a couple) tax free capital gains provision if we sell a year from now? Should we wait until January 1, 2002 to rent it? < "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Tax Prophet
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This is a great set of questions, but for specific advice as to your situation, you really need to consult a tax advisor who can review your individual facts and circumstances. In general -- 1. You do not lose your residency exemption (i.e. the $500,000 exemption), as long as you owned and used the property as your principal residence for at least 24 of the 50 months prior to sale. 2. You need to treat the property as a rental, which means that all income and applicable deductions, including depreciation, are taken on Schedule E. The depreciation taken will be recaptured at 25% tax federal when you sell your home (the residency exclusion does not apply to depreciation). If you generate a loss on the property, you'll be subject to the restrictions regarding passive losses on real estate with respect to the amount you may deduct. You need to understand the passive loss limitations regarding rental real estate. I have written about this on my website and I believe IRS has a publication on its website (linked from my Cybersurfing page) regarding this issue. 3. It doesn't matter whether you wait until January 2002 to rent it, although it could be easier from a bookkeeping standpoint to wait until next year. If the rent for December is substantial, it might be prudent to rent it in December, rather than forego the rent in favor of beginning next year for bookkeeping purposes. < "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Tax Prophet
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The Tax Prophet's Tax Class on Real Estate Taxation < "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Tax Prophet
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I was awarded $39,000 for attorney's fees in a lawsuit. I had already paid my attorney in full almost $50,000. I am being told by my CPA that I have to pay taxes on this award. This seems unfair to me, as the money I paid has already been taxed. < "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Tax Prophet
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I'm not sure why your accountant says this. It seems to be a reimbursement of fees already paid. If you deducted those fees, then this would be considered income to you under the tax-benefit rule. In general, attorney's fees awarded to you are includible in gross income and deductible by you, subject to the limitations for deductions imposed by the tax code - generally, the restrictions on using the itemized miscellaneous deduction (which is subject to a 2% of adjusted gross income floor). In other words, if your income is $200,000, your 2% floor is $4,000 and if your total itemized miscellaneous deductions were $50,000, you'd be entitled to deduct $46,000. Also, the AMT will limit your ability to deduct expenses under the itemized miscellaneous deduction. It is unfair, but the courts have been clear on the issue and Congress appears to be in no frame of mind to assist plaintiffs - regardless of the fairness. < "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> The Tax Prophet
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