Tom Kelly: Time, tax breaks for moving from unruly neighbors
If the neighbors were the prime mover in your decision to sell the family home, Uncle Sam just might give you a break.
According to Rob Keasal, certified public accountant in the firm of Peterson Sullivan, P.C., the Internal Revenue Service has provided some clarity on capital gains exclusion when a taxpayer is forced to move because of unruly neighbors.
Typically, single taxpayers can pocket $250,000 of tax-free gain ($500,000 for married couples) every two years upon the sale of their primary residence. However, if a homeowner is forced to move sooner because neighbors have refused to curtail obnoxious all night partying, complete with ear-shattering foosball tournaments or other unbearable activities, the homeowner could meet special requirements and move sooner rather than waiting two years.
“What the IRS considers extraordinary conditions or a ‘hardship test’ has now been allowed for unruly neighbors,” Keasal said. “This not only helps define what the hardship test can be but also gives a possible break to people who had to move sooner than they normally would have moved.’’
A big piece at tax time can the move itself. If you are taking a new job and move at least 50 miles from the old job, accountants say all moving expenses will be tax deductible.
“The key to any move is the time and distance test,” Keasal said. “If the person is moving to take a new job, then the new house must be 50 miles away from the site of the old job.
“A simple way to calculate is distance from the old house to the old job, plus 50 miles. The deduction can be taken in the year of the move, yet to have to stay there 78 weeks for the deduction to be valid. If you stay less than that, you should amend that year’s deduction.”
Keasal said deducting costs of a move can be viewed differently if filing as a sole proprietor.
“I had a client who moved and his move enhanced his geographic sales territory,” Keasal said. “The moving expenses—even though he hadn’t taken a totally new job—should probably be deductible. The Internal Revenue Service will consider your specific facts and circumstances, but you will first have to meet the time and distance test.”
Tax advisers say the actual costs of moving business equipment, files and records should be handled separately from domestic belongings. That’s because business expenses can help reduce self-employment taxes.
Also, if you are considering making your vacation home your permanent residence, or vice versa, you should begin planning for a change in primary residence status for the April 18 deadline.
The regular tax return filing deadline is usually April 15. However, due to the Washington, D.C., Emancipation Day holiday being observed on April 17 instead of April 16, tax day is April 18 again this year.
For example, if you have been using your vacation home as a rental, consider converting it to a primary residence for a period of at least two years. That way, if you should sell unexpectedly, you can keep up to $500,000 in gains tax free. However, use caution and keep a paper trail.
Some people who retain homes and remain active in business or community affairs in their original states are finding that state tax officials are challenging their change of personal residence. Officials contend that these folks are still residents for income or estate tax purposes because they have not abandoned their original personal residences.
When intent conflicts with facts and circumstances, determining which residence is actually an individual’s primary residence can be confusing. The determination is usually based on the individual’s objective and facts such as where you register to vote, time spent in the state of claimed residency and payment of local taxes.