Section 1725 Guidelines and Details
A friend of mine sold a second home that had considerable capital gain. According to Section 1725 guidelines, she could avoid capital gains if she lived in the home for two of the last five years. She lived there 18 months.
Through investigation, her accountant and attorney found that she could deduct 75% of the capital gains based on living in the home 75% of two years. She paid capital gains on 25% of the capital gains since she did not live in the home for 25 percent of the two years.
Make sense?
I have a similar situation with the sale of a condo that my wife and I occupied for about 20 months of the last two years.
Can you shed light on the "partial" reduction of capital gains? My friend really doesn't know the details of the tax code that allowed her to pay only 25% of the capital gains.
Please reply if you have details.
Rsnell
that's a pretty good catch, i haven't heard too much about this, anyone care to shed some light?
As near as I can tell, Section 1725 of the Internal Revenue Code does not exist, and may never have existed. There was a Section 1721-1723 in the 1939 code, but those sections have been omitted from the code since 1986.
Based on the circumstances you describe, Section 121 of the tax code applies here. If your friend sold a former primary residence after only satisfying 18 months of the two year rule, then a partial capital gains exclusion would apply only in certain specific circumstances such as health, or job transfer. Only one year of ownership and use is required in the case of a homeowner who becomes physically or mentally incapable of self care, and has to move to a nursing home.
In the event that one of these "exceptions" to the two year rule was applicable to your friend's situtation, then all profit up to 75% of the applicable capital gains exclusion would be tax free. Anything after that would be taxable capital gains. Initially, in 1997, the tax code was not clear on whether the partial capital gains exemption was based on a percentage of the profit, or on a percentage of the allowable exclusion. In 1998, Congress clarified its intent and the partial exemption is based upon a percentage of the allowable exclusion.
If your friend only excluded 75% of the profit, then a second look at the process used to calculate taxable gain is in order here. Suggest your friend find a different CPA and tax attorney and get another opinion. Perhaps an amended return is in order here, if three years has not passed since the original return was filed.
For your own situation, section 121 of the tax code still applies. There are exceptions to the two year rule that allow for a partial exclusion. Suggest you consult a professional tax preparer to evaluate whether your circumstances qualify for one of these exceptions.
[ Edited by DaveT on Date 11/05/2002 ]