Question: Much has been written about postponing tax on the sale of a home with the residence-replacement rule. But I have seen nothing on the consequences of failing to buy another home within the 18-month period. I assume tax would then have to be paid on the gain, but when would it be due? And how is it reported?
Answer: In addition to the two questions in this letter, there is a third implied question: How do you report sale of a residence and deferral of tax when the replacement residence hasn't yet been purchased?
If when you sell your home you expect to buy another one and qualify for the postponement of capital gains tax, you report the details of the sale on Form 2119 (or on a separate statement).
Then in the space provided on Form 2119 for the information on the replacement residence (or on the statement if you don't use 2119) note "replacement residence not yet purchased." Attach the form or statement to your tax return for the year of the sale.
To defer tax on the gain, you must buy and occupy a new home. If you build, you must begin construction within that 18-month period and must physically occupy the home within 24 months after the sale of your former residence.
Except for members of the armed forces or people who are living and working abroad, the period for replacement can't be extended.
If you meet the deadline and the new home costs at least as much as the adjusted sale price of the old home, you should notify the Internal Revenue Service Center where you filed the original return. You can use another Form 2119 to provide the details of the purchase.
But if you don't meet the requirements, then you must file an amended return for the year in which the old home was sold. Use Form 1040X and attach Schedule D to show the amount of the gain.
Enclose your check for the additional tax due. Then you can expect to be billed for interest on the extra tax, computed from the due date of the original return to the date of payment.
The same procedure is required if you acquire a replacement residence within the specified time, but the cost turns out to be less than the adjusted sales price of the old home.
But in this case, in addition to Schedule D you must also attach a new Form 2119 showing how you arrived at the amount of gain on which tax is deferred and the amount on which tax is due.
The amendment (with accompanying papers) should be filed as soon as possible after the expiration of the 18-month period. If you determine earlier that you will not qualify for deferral of tax, file the amended return at that time. yRemember you will be charged interest up to the date you file the amendment and pay the extra tax.
Q: Some time ago my parents added my name to their various investment accounts to facilitate transfer of their assets to me at some future time. (They haven't made wills). They receive all the income from these accounts. What, if any, are the consequences for me?
A: There are not income tax consequences for you, assuming that the accounts bear the social security number of one of your parents rather than your own.
The IRS recognizes that joint ownership of assets is often established as a matter of convenience without really indicating joint benefit from the income derived from those assets.
This form of ownership will eliminate the need to probate these assets on the death of either or both parents. Ownership will pass automatically to the surviving co-owner(s). But the assets will not be taken out of the estate for estate tax purposes.
I urge your parents to have wills drawn anyway, particularly if they have other assets -- a house, a car, perhaps some family jewelry -- that are not owned jointly with you.