Filing Taxes and Sale of House

[SinkingFast]

At our 341, our Trustee said he wants to see our income taxes we file for 2006. Our attny said the Trustee generally doesn't go after refunds that are less than $1K. Our attny also had us adjust our withholdings for the rest of the year to get our refund as low as possible.

Refund,........ I'm not worried about. Federal and State combined is gonna be less than $600 tops.

What I am worried about is the Capital Gains Worksheet you have to do for the sale of a house. Based on what we paid when we bought, and what we sold for,......... Less some improvements and costs to sell, we have a Capital Gain of $38K I think it was. We're allowed $500K before it becomes tax liable, so according to Turbo Tax, we don't have to report the Gain at all. And that's the way Turbo Tax is showing our 1040. On whatever line for Capital Gains entries, there's nothing.

Also, the Worksheet says, "Keep for your Records". So it's not something we have to file with our income taxes.

BUT, the Trustee knows we sold our house. The HUD1 Statement was in our BK paperwork.

What impact does this situation have on us submitting our Income Taxes?? Do we submit the Worksheet for the Trustee or not?? If we do, is he gonna want $38K we don't have??

[SamanthaJones]

When did you sell your house?

If it is within the filing reference period (like 6 month income look back for a CH7) I'm certain that capital gains are considered income for bankrupcty, whether it is taxable or not. Just like an income tax refund is considered income, but not considered income for IRS purposes.

[SinkingFast]

We sold the house in June. Like the 19th or so of June. Filed BK September 14th.

On our HUD1 Statement, it shows we paid $$$'s at closing. We had refi'd the house since the time we bought, and consolidated debt against the house in the refinance. So with paying our Mortgage, all the penalties, lates, fees, and associated sales and closing costs, we actually took nearly $600 to the table to get the house sold.

But, when you do the Capital Gains Worksheet, the IRS looks at your Basis or purchase price, costs of any improvements made to the property. Then you subtract out the costs to sell. That's how the Capital Gains is figured. That's where we show $38K in Capital Gains on the Worksheet.

But, because it's less than the allowable $500K, Turbo Tax does not report the "gain" on the 1040. And the "gain" is not figured into our income taxes in any way.

[SamanthaJones]

You had zero capital gain if you took $600 to closing.

What is this $38,000 you speak of?

[SinkingFast]

What is this $38,000 you speak of?

You've evidently never sold a house before.

Take the Sale Price.

Deduct out the Selling Costs. Real Estate Commissions, Title Insurance fee, other associated closing costs.

Deduct out any improvements you made while owning the home.

Replacing carpet is not an improvement as the house had carpet when you bought it. Installing tile floors when the house had linoleum is an improvement. A whole new roof is an improvement as it extends the life and usefulness of the home. Add on a room, that's an improvement.

When you get that total,..........

Subtract your Basis. The price you paid for the house plus any associated purchase costs. Points, Title Insurance, any closing costs you had to pay. Etc.

That's where the $38K Cap Gain comes from.

We sold the house for more than we paid plus the costs of improvements we made.

But if the Trustee is gonna consider the Cap Gain, then don't we get our Homestead Exemption?? We didn't take that when we filed BK.

[HHM]

My goodness, you have been around this forum giving good advice for quite some time, and this has happened...

What happened to that $38K you got from the sale? You got that money 3 months before you filed BK, how did you account for it vis-a-vis your BK petition.

[bige1030]

It looks like she pledged the equity she built up in the home as collateral in the refi to pay off other debts. Then, when the house was sold, it was liable to pay off the mortgage: part of which was purchase-money and part of which was a debt consolidation loan. The equity she built up can be split into two parts: part is due to paying the loan and the other part is due to appreciation of value (and that part is the capital gain).

Anyway, here's my advice: Complete your taxes as TurboTax is saying to. It'll make things simpler for the IRS. Besides, the trustee only asked for your taxes, not an accounting of what happened with the house. The trustee should be able to tell what happened here (if not, s/he will ask)... any gain was lost due to it being used to pay other debts. I would hope that would be seen as honorable, since you tried to pay your debts.

[SinkingFast]

HHM,............. We bought the house. 4-5 years later, we took out a 2nd to consolidate debt. The house was driving us in the hole, but we didn't see it then. Anyway,......... Another 4 years or so later, we did a total refi on the house. We did an 80/20 on a super inflated appraised value. As in they appraised the house for $252K and we sold for $212,500.

We used the money from the refi as Bige suggested. To pay off the primary mortgage and the 2nd, as well as consolidate other debt, mainly unsecured.

When we were prepping the house for sale, we cashed out Hubby's retirement IRA to pay-off the 20% second from the Refi. That left the bulk of the principal of the 80% First as our only mortgage. Otherwise, there's no way we could have sold the house.

Penalties, interest, lates, and other fees got added on top of our $194K principal balance so our HUD1 shows a Lender pay-off of $203,113. Realtor's fees and other closing costs added another $8921. When all was said and done, we had to cough up nearly $600 to get the deal closed.

As far as I know, our attny didn't address anything in the way of Exemptions since our HUD1 Statement showed a Net "Loss" on the deal. We had an unused Homestead Exemption as we didn't have a Homestead to protect at the time of our filing.

At our 341, the Trustee even asked about sale of property. We told him about selling the house. As he was turning to our HUD1 Statement he said, "Let's see how you did there." Then when he saw the HUD1 Statement he said, "Oh. I see you had a loss there." And that was it. The Trustee moved on.

When we were filing BK, I didn't even think about Cap Gains on the sale. We were so thrilled to dodge Foreclosure and get our BK filed and dealt with. But when we started doing our taxes, Turbo Tax asks about Sale of Home. And of course we did have a net capital gain based on our purchase price, improvements, and costs to buy and sell. So that's when all this came to light.

I was thinking the same thing, Bige. The Trustee asked for our Taxes. The Worksheet says "Keep for your Records" clearly typed across the top of it. Since we don't have a "taxable" gain to carry over to the 1040, it's not even something we have to file.

I have put in an email to our attny thru our paralegal. I should hear from the paralegal on Thursday. Unless she says different, I figured we'd just mail in our printed taxes the old fashioned way. Make copies and submit those to our attny to send on to the Trustee's Office. Since we don't have to submit the Worksheet, we just won't file it with the IRS or send it to the attny.

[SamanthaJones]

Simply, you did not have a gain if you took $600 to closing.

It can't be. You lost money. it's that simple.

[SamanthaJones]

I see your error.

You ADD the cost of improvements to your base cost, not subtract.

Bought house for $125,000
Added a room $34,000
New roof $8200

Basis = $146,200

Sold for, say, $135,000

Did not MAKE $21,000, but rather you LOST $11,000! (That's not even taking into consideration closing costs or commisions). It doesn't matter what you sold the place for- it's what you NET.) In your case you netted negative $600.

[SinkingFast]

Take the Sale Price. $212,500

Deduct out the Selling Costs. Real Estate Commissions, Title Insurance fee, other associated closing costs. $8921

Deduct out any improvements you made while owning the home. $38,100

When you get that total,..........

Subtract your Basis. The price you paid for the house plus any associated purchase costs. Points, Title Insurance, any closing costs you had to pay. Etc. $127,500

$212,500 -$8921 -$38,100 -$127,500 = $37979

That's where the $38K Cap Gain comes from.

We sold the house for more than we paid plus the costs of improvements we made.

It's still $38K.

[SinkingFast]

You ADD the cost of improvements to your base cost, not subtract.

Bought house for $125,000
Added a room $34,000
New roof $8200

Basis = $146,200

Sold for, say, $135,000

Did not MAKE $21,000, but rather you LOST $11,000! (That's not even taking into consideration closing costs or commisions). It doesn't matter what you sold the place for- it's what you NET.) In your case you netted negative $600.

$125,000 + $34,000 + $8200 = $167,200

Sell for $135,000,................ Net Loss,............. $32,200