What I am about to write here does not constitute tax or legal advice. But, you darn sure better get some if you find yourself in this situation.
My phone rang at 6:30 this morning. It was my father informing me about his latest tax "discovery".
My parents bought a house in Delaware back in 1991 and stayed there until about 2002. Then they bought a house in Maryland and moved, but, kept the other property and rented it out.
My parents grew tired of the rental situation and sold the house last year. When it came time to have their taxes done this year, they ended up owing $11,000 and couldn't figure out why.
Well, after much research he found his answer. Even though they had lived in the house for over 10 years and only rented it for about 4, when he sold his house, the IRS says that the difference between the $80,000 he bought the house for and the $170,000 he sold it for is now taxable income for this past year. WOW.
He had asked his real estate agent about what implications may be out there and he did not know. He talked to his tax advisers. They were very ambiguous and unsure. Even the Jackson Hewitt office who prepared his taxes couldn't tell him why he owed. All they knew was that the program they used told them that he owed this much.
I took him to Staples and we got Turbo Tax Home and Business Edition and ran his tax information through the program. The program gave us information that led him to the proper tax code.
What does this mean to us? As professionals who have influence in our client's financial decisions, we need to inform ourselves. At worst, we need to network and collaborate with other financially-related professionals so that we can be resource of information that can help them make the best decision available.
No decision is ever guaranteed to stand the test of time. But, you do want to have as much information and competent advice that is available, so that you make the best decision at the time.
**UPDATE**
I hate not knowing things. My father is the same way. So, we went out and found a good CPA and reviewed and studied.
Here is what we found: As long as the house was your primary residence for 2 of the last 5 years, you can skip that nasty capital gains income tax acceleration.
My parents have just bought another house and were in the process of moving and were going to set the previous house up as a rental when all this popped up. Initially, it scared my Dad into thinking of just selling it and moving on. Now that we have properly educated ourselves, we have been able to get the corrected deductions on this transaction and a few other issues. His tax liability has been reduced by about $4000. Just as important, we now know how to proceed more successfully in the future. Living and learning is fun, isn't it?
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