CP2000 Sale of Residence at a Loss

[Hoosier]

New client requests help with CP2000 which shows proceeds from sale of residence on 1099-S for $380k. Had the client dig up the settlement statements and turns out that there is only 22 months between the purchase date and the sale date. House was purchased for $363k. There was $21k in real estate broker expenses so when factored into the calculation results in a $4,000 loss. Its my understanding that the loss cannot be claimed on the 1040 as it was for personal property. The primary question is what is the best way to respond to the CP2000? I would think that drafting a letter explaining and showing these calculations and sending with copies of the two settlement statements would be sufficient. Is this adequate or is there a better method?

[Rapid Robert]

I would just submit the Schedule D/Form 8949 as they should have been submitted with the original return, showing the proceeds, cost/expense of sale, and adjustment code L as per instructions. They probably don't care to see the closing statements, but will ask you if so. The closing statements would not have been required with the original return, so why provide them now?

I think the best idea is to do as much of the work for them as you can, don't make them have to fill out the form for you (since I suspect that to ultimately resolve the issue, that is what has to happen).

Also, in general I think a simple cover letter with tax year, taxpayer name(s) and SSN(s), and signature(s) is a good idea. Just state to see attached schedule/form. Since there is no refund or balance due as a result, should be very straightforward.

[Beersheba]

Definitely recommend 8949/SchD to get this thing reported so they will leave you alone. Calculate loss on line 1, then on a separate line show enough income to negate the loss, noting disallowance of loss on personal residence.

[Lion]

Your software probably has a code for non-deductible loss on personal property to make it appear appropriately on Form 8949.