Closing The Door On A Tax Break - selling a home due to job loss - Brief Article

Kiplinger's Personal Finance Magazine, June, 2001 by Kimberly Lankford

Q & A | If a job loss forces a HOME SALE, you could be forced to pay tax on the profit.

I lost my job and must sell my house which I have owned for just a year and a half. Does that mean I'm stuck paying tax on the profit I make? --c.c., Culver City, Cal.

Maybe. To make up to $250,000 of home-sale profit tax-free ($500,000 for a married couple filing a joint tax return), the law says that you must have owned and lived in the house for two of the five years before the sale. But special rules apply if the sale is connected with a change in health, change in place of employment or other "unforeseen circumstances." Unfortunately, the IRS hasn't defined what those circumstances might be, and says that until it does, taxpayers are limited to the two specified exceptions.

Taxpayers who do qualify get a partial break based on how long they have lived in the house. One year, for example, gets 50% of the exclusion amount--$125,000 on a single return, $250,000 on a joint one.

The tricky question is whether losing your job qualifies under the change-in-place-of-employment rule. Most of the CPAs we talked with were skeptical, saying that they'd use the exception only for a client who moved to take a new job.

But one accountant was more aggressive. "I would sit down with the client and say, `Here are the risks and rewards of taking this position,'" says Michael Weatherwax, a CPA in Boulder, Colo. The reward: You may treat 20% of the amount of profit as tax-free rather than reporting it as a long-term capital gain. The risk: If the IRS challenges your return and decides losing a job doesn't qualify, you could get stuck with a penalty. If the tax agency considers your position a reasonable one, the penalty would basically be interest on the unpaid tax back to the time you should have paid it. (The current IRS rate is 8%.) If the IRS thinks you don't have a leg to stand on--an unlikely outcome according to Weatherwax--you could be hit with a penalty of 20% of what you owe, plus the interest charge. One way to avoid the uncertainty is to postpone the sale of the house until you reach the two-year threshold.

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