Taxation & Estate Planning

Capital Gains Caused This Taxpayer Much Grief!

By Darrin Mish

Here's another story that I was sent recently by a regular taxpayer, just like you and me:

In 2004 I purchased my first home in Phoenix, AZ.  The real estate market at the time was extremely hot and property values soared in a short period of time.  I decided I wanted to get out prior to the bubble bursting.  I researched what kind of capital gains taxes I would incur after making such a substantial profit in a short amount of time.  I found out that I could literally cut the gains tax in half if I owned the home for over a year and that is precisely what I did.

Another aspect I decided to do was re-invest the money into a small business in Oregon.  My thoughts were that if I re-invested the money that I could use it as a tax break.  I was initially wrong according to the IRS.  After doing my taxes I found out that I owed a substantial amount of money for the capital gains, but on my business as well.  I more or less felt I was being taxed twice on something that I should have been able to simply write off.

I had to get an attorney involved who dealt with taxes to sort through the issue which cost me more money.  After getting him involved we were able to resolve the issue and eventually it came to be that my gains could in fact be reinvested in the business.  Although I had to pay out on the business, they adjusted the taxes on the home.

I do not think I had ever been so stressed out in my life.  Here I thought I was making a wise decision, but instead I was going to lose money on the deal with taxation.  Although the initial audit was confrontational, it became a somewhat working relationship with them.  I was satisfied with the outcome, but in the future will make sure I know all tax laws thoroughly prior to moving any large amounts of money.

RESPONSE:

This is a typical situation we see in our offices.  People often come to us long after they have encountered a problem with the IRS.  During the time that people are waiting to seek help with their issue, they usually make things much worse.  It is important to get help when you first learn of a problem with the IRS.  One promise I can make is that the IRS will NOT forget about the money you owe them.  Waiting for the situation to "resolve itself" simply allows penalties and interest to accrue.  As this story highlights, it is also important to speak with a professional before getting involved in any situation that may have tax implications.

Full post as published by IRS Problem Solver Blog on February 10, 2009 (boomark / email).