Louis sold his home on December 14 for $285,500. His adjusted cost basis was $163,500. The various sales expenses were $33,996, resulting in a gain of $88,004.
The buyer allowed Louis to remain in the house for 30 days at $22 per day. Louis requested the sales proceeds be held in escrow until he vacated the house.
Instead of reporting the sale of his principal residence on IRS Form 2119 in the year of the closing settlement, Louis waited until the following tax year. When his tax returns were audited by the IRS, Louis argued he waited because he did not receive the sales proceeds until he moved out of the house.
Louis also explained to the IRS he did not pay tax on his $88,004 home sale profit because he planned to move to England and Internal Revenue Code 1034(k) allows home sale tax deferral when the taxpayer lives outside the U.S.
But the IRS replied there was no evidence Louis actually moved to England as his “tax home.” The IRS noted Louis failed to buy a replacement principal residence of equal or greater cost within 24 months of selling his home and therefore cannot defer paying tax on his sale profit.
Should Louis be allowed to defer paying tax on his home sale profit because he intended to move out of the U.S.?
The judge said no.
“The running of the period of time to purchase a replacement residence is suspended for the period in which the taxpayer has a tax home outside the United States, not to exceed four years after the date of sale of the old residence,” the judge explained.
However, Louis was unable to prove he physically moved to England before expiration of the 24-month replacement period, he noted.
“Absolute compliance is required even where the taxpayer was prevented from acquiring or moving into the new residence on time due to circumstances beyond his control.
“The decisions consistently hold that the time limits of section 1034 are uniformly applicable and the courts are without authority to weigh the merits of the events precipitating delay to determine whether the time limits may be waived or extended,” the judge emphasized.
Since Louis continued living in the U.S. and controlled his home sale proceeds as of December 14, he failed to properly report the sale in the correct tax year and pay the profit tax so he must pay the tax plus negligence penalties, the judge ruled.
Based on the 1994 U.S. Tax Court decision in DeMauro vs. Commissioner, T.C. Memo 1994-460.
Easement error
In 1976, Herbert, a dentist, paid $24,500 for a beach-front lot. He obtained an owner’s title insurance policy. The policy said Herbert had a 15-foot wide access easement to reach his lot.
Thirteen years later, when the lot had become worth approximately $800,000, Herbert applied to the city for a permit to build a home on the lot. But the city refused to issue a permit because it discovered Herbert’s lot only had a 7.5 foot driveway easement, which was too narrow.
Herbert filed a claim with his title insurer for negligence. He argued the lot is worthless since it cannot be built upon and lacks driveway access. Herbert claimed the $800,000 lost value of the lot.
But the title insurer, admitting its negligence, offered only $42,875 for the lot cost, including inflation coverage. Herbert sued the title insurer, also seeking $280,000 recovery for 1,400 hours at $200 per hour he allegedly spent trying to develop the lot.
Should the title insurance company be ordered to pay Herbert the lost $800,000 value of the lot with access, plus Herbert’s $280,000 claimed value of time spent on development?
The judge said no.
The title insurance company admits its negligence in checking the lot’s access easement, the judge explained, so the issue is the measure of damages for negligence. Damages for negligence are the amount which will compensate for Herbert’s detriment proximately caused thereby, he noted.
Since the title insurer did not cause the property to lack sufficient access, it is not liable for any loss of economic value of the property due to lack of adequate access, the judge emphasized.
Because the unbuildable lot was determined to be worthless, the judge continued, Herbert is entitled to the title insurance policy limit, plus inflation coverage, plus any actual costs expended.
Herbert is therefore entitled to the $42,875 policy limit, plus actual expenses, plus $66 per hour ($10,000 total) of his time spent trying to develop this lot, the judge ruled.
Based on the 1994 California Court of Appeal decision in 28 Cal.App.4th 674.
