FTB tax issue

[ER_Hopeful]

some context; my mom sold her CA house in early 2020 and bought another one in TX about 2 months later, her intention was to do a 1031 exchange. both houses were/are co-owned with my sister. in 2021, my mom was told by my sister's accountant that she need not file because she is retired and had no earned income (wrong advice, i guess). last week my mom got a letter from FTB (CA Franchise Tax Board) requesting her return because the escrow company had reported sale of property.

what's her course of action next? did she need to file back in 2021? she doesn't speak a lot of English and now having difficulty to find an account that speaks her language in the town where she lives. Better for me to find her a new accountant here in CA? (her previous CA accountant has retired already.)

 

[pb4uski]

Yes, she needs to prepare both Federal and CA tax returns for 2020 to see what her tax obligations were... and then she'll owe penaties and interest on top of what she would have owed in tax.

Since the accountant that told her hat she didn't need to file was not her accountant, she probably doesn't have a case to get reimbursement of her penalties or interest from him/her.

Is there a tax preparer in her area or your area that speaks her language?

Did your sister include either of these sales on her tax return? Were either of the properties your mother's principal residence?

If the CA property was her principal residence it might be that she doesn't owe any federal or CA income tax... in which case she may need to just file a return to prove it.

 

[ER_Hopeful]

If the CA property was her principal residence it might be that she doesn't owe any federal or CA income tax... in which case she may need to just file a return to prove it.

she had some gain from the sale but she was told that she could do a 1031 exchange if she bought another property. Also she as no longer a CA residence in 2020, could she still owe CA tax ?

 

[pb4uski]

It depends. If the CA property was her principal residence for 2 of the last 5 years prior to the sale then she probably qualifies for the gain exclusion so a 1031 is moot.

No matter what, she needs to see a tax pro.

 

[cathy63]

She could have done a 1031 exchange if the CA property was not her primary home, but did she? You say that was her intention, but did she actually complete the exchange legally? She had to file Federal form 8824 with the IRS and CA Form 3840 with the FTB by April 15, 2021. She also has to file form CA FTB 3840 every year until the final sale of the property, at which time she will owe CA tax. She can't evade the CA tax due by exchanging to a property out of state.

If her total income in 2020, including taxable profit from the sale of the house (assuming she didn't complete the 1031) and not including Social Security was under $14,500 (or under $12,400 if she was under 65 at the end of the year) then she did not have to file a Federal return. However, if she received a 1099-S for the sale of the house, which she should have because it's a legal requirement to issue one for real-estate transactions in CA, then it would have been a good idea to file anyway. Usually a 1099-S for a CA property will show a lot of income and neither the IRS nor the FTB knows whether it's excludable until the return is filed.

She should go ahead and file the CA return now. She'll have to complete a Federal return in order to do the CA return because the first thing you do on a CA 540 is to enter the Fed AGI, so she might as well file that one too.

 

[ER_Hopeful]

She could have done a 1031 exchange if the CA property was not her primary home, but did she? .

it was her primary home, so I think she's mistaken about the 1031. In that case, I think she can claim the $250 exclusion. Is the exclusion per house or per life time? meaning if she used the $250k on a former primary house several years ago, can she still use the exclusion this time?

 

[cathy63]

it was her primary home, so I think she's mistaken about the 1031. In that case, I think she can claim the $250 exclusion. Is the exclusion per house or per life time? meaning if she used the $250k on a former primary house several years ago, can she still use the exclusion this time?

The requirements for the 250K exclusion are:
- home was not acquired through a 1031 exchange
- she owned the home for 2 of the 5 years prior to the sale
- she lived in the home for 2 of the 5 years prior to the sale
- didn't use the exclusion during the 2 years prior to the sale

Requirements for a 500K exclusion:
- her spouse died during the 2 years prior to the sale
- she -or- her spouse meet the requirements above

An AARP Tax-Aide site could do this return and e-file it for her for free, but she has to be present in California to sign it, or you would have to have her power of attorney.