Q:  Can the gain from the sale of a 2nd home be transferred to adjust the basis of the primary home?  If not, what needs to be done for tax purposes?

A:  No. The sale of a second home produces a capital gain or loss; however, the loss cannot be deducted since a second home is considered personal-use property and not investment property. Note: The loss from the sale of a principal residence cannot be deducted either. To obtain tax advantages from the sale of a second home, the home should be rented out; thus converting to rental property. Rental property qualifies as investment property can a loss from the sale of rental property can be deducted (subject to limitations). The tax-free exchange provisions of Sec. 1031 (which apply to property held as an investment) could then apply to a transfer of the rental property. Alternatively, you could also sell your principal residence, move into the vacation home and treat it as a principal residence, then sell it two years later to take advantage of the exclusion that applies to a principal residence.  See my tax class/real estate section on my webpage for additional information.

Q:  If I have a capital loss carryover of $250,000 for 2001 and in 2002 I incur long-term capital gains of $75,000, can I deduct the entire $75,000 gain from the $250,000 loss?

A:  Capital losses offset future capital gains. In addition, generally up to $3,000 may be used to offset ordinary income. Capital losses are carried forward indefinitely, but cannot be carried back. For example, if you have a capital gain of $100,000 in 2000 and a capital loss of $75,000 in 2001, you cannot carry back the loss to offset the gain. If you then have a capital gain of $25,000 in 2002, you can use your 2001 capital loss to offset the gain. In addition, you may use an additional $3,000 of your loss to offset ordinary income. Suppose in 2003 you have no capital gain, you may still use $3,000 of your capital loss as a deduction against ordinary income.

Q:  Can an individual who has filed taxes for the last 3 years, but has not paid for those three years, be subject to criminal charges?

A:  If a person files a non-fraudulent tax return accurately, fully disclosing income and expenses, but cannot pay the taxes owed, there is virtually no chance that the person will be criminally prosecuted because the person lacks criminal intent. However, if the taxpayer clearly has sufficient assets to pay the tax but blatantly fails to cooperate with IRS in the payment of those taxes, the taxpayer could be engaging in criminal behavior.

Q:  Tax Prophet, you state that the law says “income is taxed to the person who earns it.” Please substantiate your assertion.

A:  Check out the Supreme Court case Lucas v Earl, 281 U.S. 111 (1930) The "assignment of income" doctrine states that income is taxed to the one who earns it — a taxpayer cannot avoid tax by assigning his income to another party or entity. Gross income derived from property must be included in the income of the person who beneficially owns it. Blair v. Cm., 300 U.S. 5 (1937); Lucas v. Earl. The assignment of income doctrine has been developed through court cases (it is not a statute) and adds to IRC Sec. 61 (the definition of gross income) an implicit requirement that gross income must be included in the tax return of the appropriate taxpayer.