IRS Notice CP2501 Sale of Home 2017 Return

Single taxpayer, who qualifies for a $250,000 exclusion on the sale of her home, sold her home and received a 1099-S for $338,500 (less selling expenses of $20,447 gives net of $318,023). Original home purchase was $162,000 plus improvements of $30,661 (she's meticulous on her record keeping), gives $192,661. This alone gives a gain of $125,362, but she also bought her ex out for $140,000.

I filled out the sale of residence worksheet. The home was appraised at $380,000 in June of 2010 when they divorced. Gives her a loss of $14,608. Drake left it at that.

Any suggestions on what else I can add when I respond to the IRS?

Thanks

I am guessing the 1099S was not included in the original return, thus the notice. Had the same situation a few years ago.

My response was to supply documentation of the original purchase price which made the matter go away with no further effort. In your case, I would add documentation of the buy out as well.

Thanks for the response but my software doesn't have a place for the 1099S except to enter gross amount on the Home Sale Worksheet.

FYI- the buyout of ex does not increase her basis.

Thanks for the response but my software doesn't have a place for the 1099S except to enter gross amount on the Home Sale Worksheet.

You would enter it on the 8949 screen as a box C/F situation (not reported on 1099-B)

Thanks for the response but my software doesn't have a place for the 1099S except to enter gross amount on the Home Sale Worksheet.

You would enter it on the 8949 screen as a box C/F situation (not reported on 1099-B)

I will take alook at that. Drake instructions did not mention this. Thanks

FYI- the buyout of ex does not increase her basis.

I'm a little confused here. She gets half the basis of the original purchase price but the basis doesn't increase because she bought her ex off? Will she get credit for the full purchase price of $162,000?

Even without the buyout, she's still below the $250,000.

From Pub. 504

Tax treatment of property received.
Property you receive from your spouse (or former spouse, if the transfer is incident to your divorce) is treated as acquired by gift for income tax purposes. Its value isn’t taxable to you.


Basis of property received.

Your basis in property received from your spouse (or former spouse, if incident to your divorce) is the same as your spouse's adjusted basis. This applies for determining either gain or loss when you later dispose of the property. It applies whether the property's adjusted basis is less than, equal to, or greater than either its value at the time of the transfer or any consideration you paid. It also applies even if the property's liabilities are more than its adjusted basis.

This rule generally applies to all property received after July 18, 1984, under a divorce or separation instrument in effect after that date. It also applies to all other property received after 1983 for which you and your spouse (or former spouse) made a "section 1041 election" to apply this rule. For information about how to make that election, see Temporary Regulations section 1.1041-1T(g).


Example.

Karen and Don owned their home jointly. Karen transferred her interest in the home to Don as part of their property settlement when they divorced last year. Don's basis in the interest received from Karen is her adjusted basis in the home. His total basis in the home is their joint adjusted basis.

sjrcpa is probably referrimg to section 1041(b).

On TaxACT, the home sale worksheet has a check box for 1099-S received. Checked, form 8949 will populate. Unchecked, it will not.

Yes I was referring to 1041(b).

From Pub. 504

Tax treatment of property received.
Property you receive from your spouse (or former spouse, if the transfer is incident to your divorce) is treated as acquired by gift for income tax purposes. Its value isn’t taxable to you.


Basis of property received.

Your basis in property received from your spouse (or former spouse, if incident to your divorce) is the same as your spouse's adjusted basis. This applies for determining either gain or loss when you later dispose of the property. It applies whether the property's adjusted basis is less than, equal to, or greater than either its value at the time of the transfer or any consideration you paid. It also applies even if the property's liabilities are more than its adjusted basis.

This rule generally applies to all property received after July 18, 1984, under a divorce or separation instrument in effect after that date. It also applies to all other property received after 1983 for which you and your spouse (or former spouse) made a "section 1041 election" to apply this rule. For information about how to make that election, see Temporary Regulations section 1.1041-1T(g).


Example.

Karen and Don owned their home jointly. Karen transferred her interest in the home to Don as part of their property settlement when they divorced last year. Don's basis in the interest received from Karen is her adjusted basis in the home. His total basis in the home is their joint adjusted basis.

Even if she gave him $140,000 for his half?

In Drake, on the Sales of Residence form, they have a miscellaneous check box to force exclusion to be printed on form 8949/Schedule D. The help behind it says:

Force exclusion to print (direct entry)

Marking this box causes the exclusion to be printed on the Schedule D
even when the exclusion is not needed.

"Even if she gave him $140,000 for his half?"

If that is part of the divorce decree as the property settlement, it does not add to basis.

If she took out a loan and secured it to the residence, the interest would have been deductible as mortgage interest.

Even though the taxable gain on the sale is excluded under §121, it is better to include it on Schedule D and include the language your tax program is printing.

The 1099-S will generate a CP-2000 notice if the sale is not reported. Had a new client who came to me because the prior CPA did not report the sale and the IRS was lookng to tax the $1m sale which obviously was incorrect. Reporting the sale will prevent the IRS notice.

...she also bought her ex out for $140,000.

Meaning there was an equalizing payment as part of the horsetrading of all the marital assets. The payment does not attach to any one particular asset. It's part of the entire divorce settlement. She gets the house and the basis that goes with it plus a bunch of other assets. He gets a bunch of other stuff including $140,000. Now they're equal.

Thanks Mike and Frank.

FYI- the buyout of ex does not increase her basis.

She gets half the basis of the original purchase price but the basis doesn't increase because she bought her ex off? Will she get credit for the full purchase price of $162,000?.

As explained above, yes. But you started out in your original calculation already giving her the full $162K purchase basis (hers plus ex-spouse), not half. So clearly you can't then turn around and give her an additional $140K basis on top of that.

FYI- the buyout of ex does not increase her basis.

She gets half the basis of the original purchase price but the basis doesn't increase because she bought her ex off? Will she get credit for the full purchase price of $162,000?.

As explained above, yes. But you started out in your original calculation already giving her the full $162K purchase basis (hers plus ex-spouse), not half. So clearly you can't then turn around and give her an additional $140K basis on top of that.

That makes sense. I had misunderstood what I read when I originally did that.

Alright guys, you ready for this? My 1,000th post!!! You know, I'd like to thank my Parents, my Family, my Friends, the little people, and of course, this forum. This is a truly special day!

Sorry Cathy, I'm not hijacking here. I had the exact same issue/letter for my client, for tax year 2017, and I also use Drake. I filled out the 2119 (Home Sale Worksheet). I assumed this form transmitted, my client was able to exclude the full gain, but alas, he gets the nasty CP2501. I responded to the IRS with the same Worksheet 2119 (HOME in Drake), as well as a Schedule D, reporting the full gain. Then, in the middle of the D Screen, there are 3 Adjustments with pull down tabs; I selected "H", then I put a negative amount (same amount as the gain) in the box next to the H (adjustment to gain or loss), which zeroes out the gain. The worksheet explains the cost basis (improvements, etc), and the Schedule D reflects the holding period.

That, and a letter indicating the taxpayers wish to elect to exclude the gain, or as much gain as she can, and also I would mention the sale was reported, but on the Worksheet, which you assumed was attached to the return, or some other type of feel good language, etc.

Good luck, I will let you know if I catch any flack from the IRS on the response.

Again, thank you all, 1,000, I really didn't think I would live that long!

Thanks Dave and congrats on your 1000th post! I am honored that you celebrated it for me!