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11-28-2017 10:47 AM - edited 11-28-2017 11:15 AM
We are filing a joint return. We sold my wife's home that she lived in 2 out of 5 years, but the last 2.5 we converted to a rental. We are expecting the $250k exclusion of capital gains taxes since she met the use and ownership requirements. This may be contributing to a potential error since I can get the expected result for a $500k exclusion, but not when we specify only one of us qualifies.
In the sale of home portion of the software there is a Part D: How to figure your taxable gain or loss worksheet (pub 523) where I think there may be a software bug. Question 2 shows the First test (did not use home for business or rental) and 2nd test (used home as main residence or one of 3 situations apply). For us, we did not meet the first test, but did the 2nd (used as main home 2 of last 5 years). Therefore you go to line 3 since we did not meet both tests (mini-worksheet for line 3: Determine Taxable Gain).
This is where I believe there is a problem with the software H&R Block Premium 2017. For part 3 of that mini-worksheet (Non-residence Gain) it asks the number of days you did not use as a main home. However, there is never any consideration for passing the 2nd test sub-conditions above (lived main home 2 out of last 5 years). From page 16 of IRS pub 523, to determine taxable gain it states for 3c:
"Did you have non-residence gain? If there were times after 2008 when neither you nor your spouse (or a former spouse) used your home as a main residence, and didn’t meet the situations under the Second test, above, do the following calculation:"
The highlighted portion is the issue. The software does not seem to account for meeting the situations under the second test (lived in home 2 of last 5 years). It just calculates the non-residence gain based on your percentage of days lived there and never asks if you met any of the second test conditions. If you did meet one of the second test conditions, I believe you are eligible for the full exclusion (250k single/500k married assuming meeting other requirements of the exclusion) and it should not be calculating a portion for non-residence gain. This can make a huge difference.
Am I missing something or is this a bug?
Solved! Go to Solution.
11-28-2017 01:53 PM
I actually misspoke, the same issue occurs whether it's for a joint $500k exclusion or a single $250k exclusion.
This statement was incorrect: "This may be contributing to a potential error since I can get the expected result for a $500k exclusion, but not when we specify only one of us qualifies."
12-04-2017 11:35 AM
Hi John. I see your point. It sounds like the calculation in 3c of the "How To Figure Your Taxable Gain or Loss Worksheet" should be skipped if you meet one of the 3 situations in line 2 of the same worksheet.
I'm looking into this for you. Please give me a couple days to see what I can find out.
12-05-2017 11:15 AM
John, here's the scoop.
You are probably correct. T
Part D of the Sale of Home Worksheet is the "How to Figure Your Taxable Gain or Loss Worksheet" that you can find in IRS Publication 523. For item 1 of the Second Test, they even used the same poor/inaccurate wording.
Second test: You, your spouse, or your former spouse used your home as a main residence continuously from January 1, 2009 until the date of sale—or if that isn’t the case, and there was a period of non-residence use, one of these situations applies.
1. Any portion of the 5-year period ending on the date of sale or exchange after the last date you use the property as a main home (meaning you owned and lived in the house for at least 2 years from the 5-year period ending on the date of the sale).
2. You had a change in employment, a health condition, or other “unforeseen circumstance” described in Does Your Home Qualify—Details and Exceptions, earlier, and you moved out of your home for not more than 2 years in total. 3. You or your spouse qualifies for the “stop the clock” exception for certain military, intelligence, and Peace Corps personnel described in Service, Intelligence, and Peace Corps Personnel, earlier.
The explanation in parentheses does not correctly state the exception. This is the explanation according to the Internal Revenue Code (IRC), section 121(b)(5)(C)(ii)
(ii) Exceptions The term “period of nonqualified use” does not include—
(I) any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse
(II) any period (not to exceed an aggregate period of 10 years) during which the taxpayer or the taxpayer’s spouse is serving on qualified official extended duty (as defined in subsection (d)(9)(C)) described in clause (i), (ii), or (iii) of subsection (d)(9)(A), and
(III) any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the Secretary.
Item (I) means that if you never moved back into the house after putting it up for rental, that rental period is not considered a non-qualified use, and you will not have any "non-residence gain". From your original post, it appears that the last 2.5 years were a rental and your wife never moved back in before selling the house. So the program should ask the question and not do the calculation in 3c.
I am sending this issue to the development team for correction. The next revision to the software is scheduled for Jan 5, 2018, and I don't know if they will have the fix in that revision or if it will be later. Update your software after that revision comes out, then check to see if it has been fixed.
12-06-2017 12:34 AM - edited 12-06-2017 12:37 AM
Thank you for investigating this. Your understanding of our situation is accurate and as I felt is not being captured correctly in the software. It can obviously have a massive difference in the calculated taxes without the full exemption.
Glad it has been noted and due for fix in a future update. I'm sure many people will experience the same issue.
And yes, I agree that IRS Pub 523 item 1 of the 2nd test is pretty poorly worded and I would not have understood it on its own. However, during the past week after seeing how tax law/reform is sometimes inked in cursive in the margins at the last minute before being voted on I could see how the wording could be subpar!
04-10-2018 02:27 PM
I posted the original question, but the software was never updated by February at least. To workaround it I simply changed the answer to the question to ensure it calculated the appropriate full exclusion since the question does not clarify for the nonqualified use exemptions. You can also manually overwrite the value, but I think that prevents e-filing.
However, just doing that did not enable me to finish my taxes using H&R Block. You have to report the house sale on Form 4797 but there's no automation or guidance on how to do that after you've finished the sale of home section. In the end, I had no idea how to complete the form and was going to hire a tax professional, but tried out turb0 tax and found that their software asks the questions appropriately and prepares form 4797 for you based on your answers. It was a big aha moment after struggling with h&r block a long time with this. So I'd recommend switching (even though it's a pain to re-enter info) or hiring a professional if you want to be successful.
04-11-2018 08:55 AM - edited 04-11-2018 09:25 AM
wow, thanks for your answer on this. so what did form 4797 end up looking like that was different between TaxCut and TurboTax? how were the questions different? There was a software update yesterday to TaxCut so I'd love to know if it was fixed.
My workaround now is to not indicate sold or disposed of the property in the rental/royalty section since I do indicate it was sold in and am claiming exemption in sale of home section (except for depreciation). TaxCut not throwing errors on that.
04-11-2018 11:09 AM
H&R block makes you fill out the form 4797 section after completing the sale of home section, but doesn't give you any further guidance. Even after getting the correct numbers on the printed form 4797 from Turb0Tax, I couldn't use H&R block to generate the 4797 properly so I abandoned it. It would have required simply manually entering into the form.
Turb0Tax automatically generates the 4797 for you if you've completed the rental properties section and sale of home section. It pre-populates an amount in the sale of business property section (4797) that you cannot edit in that section since it's based on the sale of principal residence. If you try to add any more info there you're just duplicating more income, which is basically what happens in H&R Block every time so it makes it seem you owe way more taxes than you actually do.
Then if you review the 4797 print out from Turb0Tax you see how it properly enters the numbers in PART 1 - 2a) of the 4797. It bases the sale price proportionately on the land value, takes into account the section 121 exclusion (-250,000 or -500,000). Then in PART III - 20 thru 24 it calculates the property value from sale price and takes into account the depreciation owed to get your adjusted basis and amount owed. Those sections are where everything is calculated and I found no way to do that in H&R Block.
And as I mentioned in my previous post, Turb0Tax asks the question and calculates the 250,000 exclusion appropriately based on a question in the sale of home section. It asks "Did you use this home for anything other than your primary home" which at first glance seems like yes, I did since I rented it out. But in the help popup, it shows that you answer No if it was used for rental after it was already used as a principal residence. So this ensures you qualify for the exclusion.
As for your workaround, I don't think that will work. I don't know if that will even generate a form 4797, but that's how the sale should be reported. It's a rental property sale, not a personal property sale but you can account for using it as your principal residence for 2 out of the last 5 years and get the exclusion on form 4797. Even if H&R Block doesn't throw errors, I believe it's wrong.
I spent a lot of time researching the forums to figure it out, but never did with Taxcut. It only became clear after switching to Turb0Tax (and I've used Taxcut all my years before this). I'd highly recommend spending the extra $ on Turb0Tax, since this scenario is complicated.
04-11-2018 01:19 PM
well i think that seals it for me, i will abandon H&R block and get the TurboTax. Thank you very much for all the detail this will save me a lot of stress.