CP2000 from 1099-S & home sale

As accountants, we often receive panicked calls or emails saying “the IRS is trying to tax me on my home sale, but I should not have to pay tax on that!” 

Normally, when you sell a home and you had less than $250,000 in capital gains ($500,000 for joint filers), you are safe from capital gains tax as per the IRS Section 121 Exclusion. This exclusion states that you are not to pay tax for capital gains lower than those thresholds.

So, what do you do? File your tax return quickly on TurboTax or HR Block online knowing you are safe. However, 18 months later, in comes a CP2000 letter asking you to pay an astronomical amount. This happens for a very simple reason – the IRS received a 1099-S form resulting from your home sale. Since the IRS does not know your original cost basis (what you paid for the home), they automatically assume your sales price is the full capital gains (because, why not?) and tax you on the whole thing. 

Of course, the IRS also does not know about any major improvements to the home, such as additions, major remodeling, driveway additions, etc. which would further decrease capital gains below the threshold amount. 

Not only do they assess a balance due, but they also assess negligence penalties & interest.

This is a very common situation & is normally caused by filing your tax return without accounting for your 1099-S. Even if you are under the threshold, there are important worksheets & disclosures to be completed. 

Luckily, we at Dimov Tax specialize exactly in removal of this tax, penalty, interest, everything. We can handle this in all 50 states quickly & efficiently. 

If you need help getting this resolved, please contact Dimov Associates at the contact below. We are more than happy to assist.