28 Mar Do I really owe this money after selling my home?

Q. I purchased the property in New Jersey in 1997 for $60,000. It was my primary residence but then I rented it out. The lease with my renter ended in August 2020 and I notified her that I was not going to renew the lease because I planned to move back in. She refused to leave and I had to file an eviction case, which was delayed because of COVID, and I only received the judgment in April 2022. I moved back in but had to sell the property in May 2023 due to financial hardship and used $315,000 to pay my credit cards debts. Now I found out that the IRS will be treating it as rental property sales and I have to pay a huge tax — $77,000. I didn’t know about the two-year rule and this whole thing was delayed because of COVID. What can I tell the IRS to get relief?
— Struggling

A. What a mess.

Indeed, the courts were incredibly backed up during COVID, and added protections for renters made eviction cases challenging.

Let’s first review the tax exclusion for a primary residence.

If you have a capital gain from the sale of your primary residence, you may qualify to exclude up to $250,000 if you’re single — or $500,000 if you’re married and file a joint tax return — of that gain on your tax return, said Joseph Sarnecki, a certified financial planner with U.S. Financial Services in Fairfield.

The capital gain is the sales price, minus the purchase price plus any improvements made to the property, he said, adding that this is why it is important to keep detailed records.

He said in order to qualify for the Section 121 exclusion you must pass two tests: ownership and use.

“You must have owned and used your home as your primary for a period of at least two years out of the five years prior to its date of sale,” Sarnecki said. “The two years do not have to be consecutive. Investment properties do not qualify and generally, you’re not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.”

There are some exceptions to the rule, one being “unforeseen circumstances” in the eyes of the IRS, he said. This is defined as “an event that you could not reasonably have anticipated before buying and occupying your main home.”

So it sounds like you could have a shot here. Sarnecki recommends you consult with a tax professional or attorney regarding clarification on your eligibility and help navigating the complexities of the tax law.

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This story was originally published in March 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.