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Exception allows gain exclusion for quick-turn sale

Q: My husband and I purchased a home in July 2019. It was a replacement for our prior home because we wanted to downsize after the kids moved out on their own. Our last home was sold in April 2018 for a gain that we excluded from our tax return. I began to make visits to my mother in Scottsdale, Arizona, shortly after our move, and as her condition deteriorated, I felt that I had to move to be with her. My husband, an engineer, started interviewing for jobs and was hired for a new job in Tempe starting in March 2020. We initially lived with my mother, who has a lot of additional space, but later purchased our own home in Gilbert. Our home in Albuquerque sold in March 2021 and our Gilbert home was purchased in December 2020. My mother’s home was sold and she lives with us in Gilbert. This may be too much information but we need to know if we can exclude the tax gain from the sale of the Albuquerque home. The sale was within 24 months of our prior sale and within 24 months of our move-in date, so we don’t meet the IRS rule of 24 months of ownership and use. But we understand there is some exception for a move for a medical reason. We have extended the 2020 return to try to determine if we meet the medical exception based on my mother’s care.

A: Let me take this a step at a time. The tax law allows a $500,000 exclusion for gain realized when a married couple sells a home that they have owned and used as a principal residence for 24 of the 60 months before sale. Only one exclusion may be claimed every 24 months.

You fail two parts of the exclusion test. First, you did not own and use the “downsize” home for 24 months before sale. Second, the sale was within 24 months of the prior sale for which an exclusion was claimed.

Several exceptions may apply to your situation. The law allows an exception to these 24-month periods if the move had as its primary reason a change in place of employment or a health care reason.

There can be only one primary reason, so you cannot satisfy both of these exceptions. It sounds as if your husband’s change in employment was not the primary reason for the move, but instead a consequence of the move.

The primary reason seems to be the health of your mother. Health care needs may qualify you for an exception even if it is not your needs being met. The needs of any “qualifying individual” will suffice. Your mother is a qualifying individual.

The exclusion must be reduced to reflect the period of qualifying use. In your case the exclusion may be measured by taking the 19 full months that you owned and used the home (August 2019 to February 2021) and dividing by 24 months, and then multiplying by the $500,000 exclusion.

This would give you an exclusion of $395,833. You can be more precise by using days of use divided by 730, but I am sure that the monthly figure will be sufficient to exclude all gain.

Q: When we start receiving the $300 monthly payment for our 1-year-old will we need to plan for this being taxable when we file our 2021 return?

A: No, this is actually an advance payment of the 2021 child tax credit. The IRS determines eligibility based on 2019 or 2020 tax filings. Payments will be made for the last six months of 2021.

When you file your 2021 tax return, you will determine the “proper” child credit based on 2021 income. If your income is too high, you may have been paid too much and your tax liability may then be higher because of the excess payments.

If your income stays about the same, or at least is at a level that allows the full $3,600 annual credit (this is how they compute $300 per month), you will not have to give any of it back. However, the credit on the return is reduced by the advance payments.

James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. Reach him at jimhamill@rhcocpa.com.

 



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