$250K/$500K Home tax exempt - what about previous homes?

[ERD50]

I've never found anything clear on this. The $250K/$500K (single/married) exemption on cap gains on a primary residence took effect in 1997. But what about any previous home sales? At the time, the cap gains were rolled into the next home, and nothing due until a final sale. Do they get chained together to the post-1997 sale, or ignored? (skip to the last bold for the concise version w/o example).

For simplicity, assume the cost basis is just the purchase price. What happens with this example string of buys/sells?


Buy_ Home #1: $25K in 1975
Sell Home #1: $50K in 1985 ( $25K cap gains was deferred, rolled into Home #2)

Buy_ Home #2: $ 50K in 1985
Sell Home #2: $100K in 1995 ( $50K + $25K cap gains was deferred, rolled into Home #3)

Buy_ Home #3: $100K in 1995
Sell Home #3 : $600K in 2020


The sale of Home #3 has cap gains of $500K, so would be exempt. But what about the previous sales? They generated $75K of cap gains. Are those rolled into the cost basis of Home #3, or ignored? If rolled up, the cap gains are $575K, and taxes are due.

Does the IRS expect you to have cost basis records back to 1975 (they do for stock buys for example, so I guess so)? I dug up my 2119 forms (Sale/Exchange of Your Home/Principal Residence) for the actual years I bought/sold the homes, and I see that the cost basis of my current (#3) home was reduced by the deferred gains, so that would increase the gain on the sale. But when I look at the current rules in pub 523, it just asks for purchase price, no mention af the form 2119 adjusted basis. Is it just 'forgiven'? https://www.irs.gov/pub/irs-pdf/p523.pdf The "good" news is, with either the straight purchase price or the adjusted price, we won't be exceeding the $500K gain anyhow, even w/o accounting for capital improvements (be nice to throw out all those old receipts!). But I'd still like to understand this.

Now that I was forced to go through this thought process to write this, I guess it all comes down to:

Does my cost basis for home #3 start with the actual purchase price, or is it the lower number (higher gain) from my old 2119?

TIA - ERD50

 

[pb4uski]

Just off the cuff guess... no look back so your gain on home #3 is $500k and you get a free pass on the $75k of gains on previous sales that got rolled into your basis... sort of the same as if the gain exclusion existed from the beginning.

 

[cathy63]

See page 13 of IRS pub 523, where you figure your basis adjustments by including "l. Any gain you postponed from the sale of a previous home sold before May 7, 1997".

 

[ERD50]

See page 13 of IRS pub 523, where you figure your basis adjustments by including "l. Any gain you postponed from the sale of a previous home sold before May 7, 1997".

Ahhh, there it is, in black & white! Thanks.

I just missed it, and I did a "find" on "2119", you'd think they'd reference that.

So it seems a cost basis could be negative, right? If I had built up a string of deferred gains of say $200K, and bought a new home for $150K, it would be -$50K.

Well, either way, looks like it was good to have extra copies of that 2119 filed away, and like I do with 8606, I'll keep one in my current files.

edit/add: I searched and searched, and this just didn't come up in any of my searches. They just give the simple "if the gain is less than $500K"... with no reference to previous postponed gains. I suppose the tax software would bring this up, but it might just ask for costs basis?

-ERD50

 

[cathy63]

Yes, your adjusted cost basis could be negative.

You got me curious about tax software, so I looked at TTax. It asks for "Adjusted Cost Basis", and you can just enter a number if you want, or you can click on the "Easy Guide" button which basically walks you through the worksheet in pub 523. If you answer Yes to "Have you ever sold a house before?", then you get to the screen below. So, it does ask, but you could easily bypass it if you mistakenly thought you knew what to enter there.

If you do your taxes manually, the Sched D instuctions also refer you to pub 523.

 

[ERD50]

Yes, your adjusted cost basis could be negative.

You got me curious about tax software, so I looked at TTax. It asks for "Adjusted Cost Basis", and you can just enter a number if you want, or you can click on the "Easy Guide" button which basically walks you through the worksheet in pub 523. If you answer Yes to "Have you ever sold a house before?", then you get to the screen below. So, it does ask, but you could easily bypass it if you mistakenly thought you knew what to enter there.

If you do your taxes manually, the Sched D instructions also refer you to pub 523.

Thanks. I just did a quick check of this in TaxAct on-line (I already filed, so I need to create a new filing to make the entry), and they didn't appear to do so well. It just asked for "Purchase Price", costs associated with the sale, and adds/subtracts to basis, w/o specifics. Nothing asking for "postponed gain" or a form 2119 that I could see.

While not common, I'm certainly not alone in having gains prior to 1997, and will be selling a home (unless we die here so heirs get stepup, which is unlikely) purchased before those sales. All the tax software should handle this (and Congress should simplify everything to do with taxes).

edit/add: I took a second look, they don't have a guided walk through, but if you click on their "Suggested Topics", and read through several pages of unrelated stuff, there is one line about postponed gain. I'm sure 99.997% of people would miss it.

-ERD50

 

[jazz4cash]

There’s no way IRS can accurately track IRA basis, rollover limitations, and distributions accurately. Unfortunately the burden of proof may be on the taxpayer but if you have reasonable records I think you will be ok. I have carefully and successfully avoided intermingling funds and maintain zero basis in our IRAs. I recall stumbling onto the issue a long long time ago. All the wasted time, energy, and resources to produce form 5498.