Schedule D Gain on sale of a home

[rose323]

Hi, Everyone. I am helping a client who sold their home in 2021. The Purchase Price was 111k in 2001, but it sold for 520k in 2021, and the total expenses, including the mortgage payoff, are 256k. I am creating their return since they did not file for the gain realized. It is my first time working on Schedule D. I am finished with the return and need to know if it is correct or if it is possible for someone to give me some pointers on what to check for to make sure the return is correct. The return shows a loss on the sale of 103k. Does this seem right? 

The client was 72 at the time of the sale of the property. 

[IRonMaN]

Beep, beep, back up.  The mortgage payoff has nothing to do with basis.

[athaureaux6]

Hi, I think you need to provide more information. The numbers just do not add up. How did you get to a loss of 103K? Or you entered something wrong, or you are missing information in your question. Thank you. 

[garman22]

just on the face of it, you have a gain from the 2 numbers provided. The mortgage owed has nothing to do with the capital gain. 

There are more factors at play here. 

[IRonMaN]

As a side note, why are you trying to file a 2021 return now?  You say "they" which would seem to indicate a couple and if it was their primary residence they would be able to exclude a properly calculated gain of up to $500,000.

[rose323]

I am filling out the Home Sale Worksheet, and 1a is the purchase price of 111,000. In the next section,  (2) Increases to Basis, I entered all the legal fees, commissions, title charges, escrow charges, and Misc. Charges Government and transfer charges. I also added the payoff amount under that section (2) for a $224,000 payoff amount.

[rose323]

The client is single, with 250k exclusion. She received the letter from the state of California, and client 72 did not reach out to consult if she needed to file for the gain. She is reaching out since the letter gives her until 01/06/2024 Monday to file 😞

[IRonMaN]

Line 2f should be zero, not 250,000

[IRonMaN]

As another side note, no improvements were ever done in 20 years?

[rose323]

Thank you. Is the payoff amount wholly absent from the return? If so, may I have a reference or article to refer to if the client asks why? 

I also reached out to the client regarding repairs in 20 years. Hopefully, she has information since I had to confirm the purchase price on Zillow. 

[abctax55]

Point out that they didn't report the loan as income (I hope...). 

So when the principle is paid back either thru the monthly payments OR when the home is sold, the loan repayment isn't a deduction.

Can't say there's a specific IRC - it's basic logic/accounting.

[TaxGuyBill]

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@rose323 wrote:

Thank you. Is the payoff amount wholly absent from the return? If so, may I have a reference or article to refer to if the client asks why? 

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It might help to think of some hypothetical examples.

Let's say taxpayer A buys a house for $100,000, in cash (no mortgage).  The next day, he sells it for $100,001 (no mortgage to pay off).  He would have a taxable gain of $1.

Now let's say taxpayer B buys a house for $100,000, with a $100,000 mortgage.  The next day, he sells it for $100,001 (and pays off his $100,000 mortgage).  If the mortgage payoff was a deduction, that would mean there would be LOSS of $99,999.  That doesn't make sense, right?

[BobKamman]

"I am creating their return since they did not file for the gain realized"

"They" implies more than one owner/seller.  Was she single when the property was purchased?  If not, when did the co-owner die?  Who prepared the 2021 return?  Has anyone asked that person why the sale was not reported?  

The house was obviously refinanced, if the mortgage payoff was twice the original purchase price.  That's an additional reason that mortgage payoffs are not deductible from the gain.  Otherwise, everyone with a taxable gain would just refinance before selling.  

[qbteachmt]

"Thank you. Is the payoff amount wholly absent from the return? If so, may I have a reference or article to refer to if the client asks why?"

How about this perspective: That's already included in the numbers. The original purchase price is there. Whether or not it was paid with cash or by borrowing (mortgage) has nothing to do with anything. You're mixing in her Net Payoff with the sale details. Yes, it affects cash. No, it's not part of the gain or loss, because you already put her original purchase in there, and not listing only her cash down and principal payments all these years. There is no Reference. It's how the math works. Borrowing or not has nothing to do with the property. It has to do with if she gets all the sale proceeds, or part of it will pay off her loan.

You don't use Zillow for the price. You want her closing (HUD) document. Otherwise, how do you know the sale and the associated costs are correct? It's only 3-4 years ago. Your client should have their copy, or the title company has it.

Regular repairs don't really affect basis. One broken window or 3 water heaters over the year, don't count. All new windows would count. A new fence or sidewalk would count. A new furnace and water heater prior to sale ("fixing it up") would count.

We are all assuming she lived in it 2 of the recent 5 years as her primary residence, and not in assisted living or with relatives.

[BobKamman]

@qbteachmt   I think what was meant is that Zillow was used for the purchase price, a couple decades ago.  In some places that's also available online, but Zillow is an acceptable second choice if the client remembers "that sounds right."  For example:

Price history

Date	Event	Price
10/17/2003	Sold	$95,000+111.1%$89/sqft
Source: Public Record Report a problem
10/22/1996	Sold	$45,000+12.5%$42/sqft
Source: Public Record Report a problem
6/5/1996	Sold	$40,000$38/sqft