I made a big boo boo
Hi tax experts on this forum,
I need some advice urgently. I do my taxes myself every year using Tax Cut but every year it seems to get a little more complicated since I do a bit of real estate investing. In 2004, I sold a three family house in which I occupied one of the units. The size of the entire house is appx. 4,500 sq. ft and I occupied about 2,700 sq ft. During the two years I owned the house, I allocated 2/3 of the house as rental and depreciated 2/3 for tax purposes. When I sold, the house, however, I excluded the entire gain because I mistakenly thought that since it was my primary residence, the gain was not taxable. I did file a form 4797 with my tax return declaring the 2/3 of the gain but claiming the entire amount of $63K as an exclusion.
In researching the tax treatment for a friend who has just sold a house similar to mine, I realized that I misinterpreted the tax code. Now, I am anxious because the IRS did not send back the return for me to correct and I am worried that when they do, I would have a tremendous liability plus penalty and interest. Will the fact that I filed the 4797 definitely result in an audit? Advice please since I've never had a situation where something like this has happened since I always ere on the side of caution.