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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!