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Capital Gain Exclusion during Covid-19 Pandemic

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    #1

    Capital Gain Exclusion during Covid-19 Pandemic

    In selling their primary residence the 2 out of 5 year window closed for the taxpayers on 4/17/20. They were in contract to close on the sale in March of 2020, however Covid-19 forced the seller to cancel and the sale did not go through. With a new buyer the home was then sold on 10/17/20, 6 months too late. Based on the "Unforeseen Circumstances" this brings up two questions:

    1 - Can we still use the full CG Exclusion?

    2 - Can we use a reduced CG Exclusion? And if so, would that be reduced by 8mo/60mo (13.3%) or 8mo/24mo (33%)?
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    #2
    It appears you are asking about exceptions to the 2-years minimum ownership and use requirement. However, the situation you describe sounds like they fully met the 2-year ownership and use requirement, but waited more than three years after they moved out to sell. (Please elaborate if this is not the case). There is no "unforseen circumstances" exception for the 5-year window. Only Service, Intelligence, and Peace Corps personnel qualify for an exception to the 5-year requirement, and the exception is not based on "unforseen circumstances".

    Or, as Pub 523 puts it, "The situation causing the sale arose during the time you owned and used your property as your residence." Clearly that does not apply here, as the property was not being used as a primary residence at time of sale.

    So, the answers to your questions are:
    1) no
    2) no
    "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard

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      #3
      Thank you for the response Rapid Robert. Your assumptions are correct and I understand your answer to number 2. It has been hard to find any guidance on number 1 but it seems like they should get some relief related to the situation/circumstances. Obviously part of the thought process is wishful thinking, but can you suggest the best way for me to keep researching? This just got presented to me so I have lots of time. Thanks again!

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        #4
        I gave you the same answer some time ago on another forum, with a citation to the Regulation (which is pretty much what Robert pointed out the Publication says). So there really isn't anything further to research.

        As I said on the other forum, it is possible the IRS/Treasury could issue a new rule for this, but I doubt it. The law already gives you THREE YEARS of flexibility.

        Comment

          #5
          If it was vacant for three years, which seems unlikely. they may have done some rental during that period. Which they may not want to tell you about. Review the benefit of a sale of rental property.
          This post is for discussion purposes only and should be verified with other sources before actual use.

          Many times I post additional info on the post, Click on "message board" for updated content.

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            #6
            Thank you TaxGuy Bill. I did not ask this on a separate forum so that must have been someone else.

            Bob W, I am about to confirm if it was rented or not. Can you elaborate a little more when you have time? Thank you in advance.

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              #7
              Loss on personal property is not deductible but loss on rental property can be deductible. Probably not in tis case since you are referring to capital gains, sorry for my post.
              This post is for discussion purposes only and should be verified with other sources before actual use.

              Many times I post additional info on the post, Click on "message board" for updated content.

              Comment

                #8
                Originally posted by BOB W View Post
                Loss on personal property is not deductible but loss on rental property can be deductible.
                The basis for computing any loss would only be the LOWER of the owner's adjusted basis, or FMV at time of conversion to rental use. So for most real estate, it would be pretty unlikely in the given time period that there would be a deductible loss even from the last 3 years as a rental (any loss arising from the period of use as a personal residence would not be deductible).

                Originally posted by Daniel Scott View Post
                window closed for the taxpayers on 4/17/20. They were in contract to close on the sale in March of 2020, however Covid-19 forced the seller to cancel
                Not only did they have 3 full years to execute a sale, but even with a cancellation in March, there is no reason why they still could not have sold the property before Apr 17th. They would have to demonstrate that every single mortgage lender and every single escrow firm had completely shut down all transactions "unexpectedly". I'm sure if they cut their asking price by 30-50% they could have easily completed the sale before the closing of the Sec 121 window. So to say they were "forced" to cancel their sale is inaccurate. The "unexpected circumstances" exception is for forced sales, not cancellation of a sale.
                "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard

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