Q: My husband and I bought a house in July 2019. It was a replacement for our previous house as we wanted to downsize after the kids moved out on their own. Our last house was sold in April 2018 with a profit that we excluded from our tax return. Shortly after we moved, I started visiting my mother in Scottsdale, Arizona, and as her condition worsened I felt that I had to move to be with her. My husband, an engineer, started job interviews and was hired for a new position in Tempe from March 2020. We initially lived with my mother, who has a lot of extra space, but later we bought our own house in Gilbert. Our Albuquerque home was sold in March 2021 and our Gilbert home was purchased in December 2020. My mother’s house 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 on the sale of the Albuquerque home. The sale was made within 24 months of our previous sale and within 24 months of our move-in date, so we do not meet the IRS rule of 24 months of ownership and use. But we know that there are some exceptions when moving for medical reasons. We have extended the 2020 return to see if we meet the medical exemption for caring for my mother.
A: Let me take it step by step. Tax law provides for a $ 500,000 exclusion from profits when a couple sells a home that they owned and used as their primary residence for 24 of the 60 months prior to the sale. Only one exclusion can be asserted every 24 months.
You fail two parts of the exclusion test. First, you did not own and use the “downsized” home for 24 months prior to selling it. Second, the sale occurred within 24 months of the pre-sale for which an exclusion was requested.
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Several exceptions can apply to your situation. The law allows an exception to these 24-month periods if the main reason for moving was to change jobs or for health reasons.
There can only be one main reason, so you cannot meet these two exceptions. It sounds like your husband’s change of job wasn’t the main reason they moved, but rather a consequence of the move.
The main reason seems to be your mother’s health. Healthcare can qualify you for an exception even if your needs are not met. The needs of a “qualified person” will suffice. Your mother is a qualified person.
The exclusion must be reduced to the period of qualifying use. In your case, the exclusion can be measured by dividing the full 19 months that you owned and used the home (August 2019 to February 2021) by 24 months and then multiplying by the exclusion of $ 500,000.
This would give you an exclusion of $ 395,833. You can be more accurate by using the days of use divided by 730, but I’m sure the monthly figure is enough to exclude all profits.
Q: If we receive the monthly payment of $ 300 for our 1 year old, do we need to plan for it to be taxable when we file our 2021 return?
A: No, this is actually a prepayment of the 2021 child tax credit. The IRS determines eligibility based on tax returns for 2019 or 2020. Payments are made for the last six months of 2021.
When filing your 2021 tax return, you will determine the “correct” child credit based on your 2021 income. If your income is too high, you may have paid too much and your tax liability will be higher because of the overpayments.
If your income stays roughly the same, or at least at a level that allows for the full annual credit of $ 3,600 (this is how we calculate $ 300 per month), you don’t have to return any of that. However, the credit note for the return will be reduced by the advance payments.
James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. Reach him at [email protected].