capital gains taxes and chapter 7 liquidation of my home

[craigm]

In all likelihood, the sale of my home by a BK trustee in chapter 7 will result in more capital gains tax being due than the cash from the sale (it has appreciated a lot over the years, and I've remortgaged it several times with cash out). I was told by an accountant that if the house is sold by the trustee in Chapter 7, any deficiency in the capital gains taxes would not be referred back to the debtor (me). Is that true? Can I also assume that there would be no cash coming back to me from my 75k homestead exemption? I'm just trying to plan before filing.

[daylate]

Removed-I decided that I wasn't sure of my answer so better left unsaid.

[debee]

My understanding is that when your assets pass into the bankruptcy estate, it's not considered a disposition and is not a taxable event. When they pass back to you (whichever ones do), same thing. The bk estate is a separate taxable entity. It will get your house, dispose of it, realize the income and pay whatever taxes. This stuff is covered in IRS pub 908, pg 4-7. http://www.irs.gov/pub/irs-pdf/p908.pdf

eta:ps. if it was your principal residence, you have the 250K capital gains exclusion, 500k if married.

[craigm]

Thanks. I do get that the trust is a separate entity and the events are not taxable, etc. But it seems that the Capital gains tax calculated after the sale is based on my attributes (my basis) and if so, I'm sure that the capital gains tax due from the estate will exceed the cash left after paying the sales costs, trustee fee. So does that deficiency then come back to me since Taxes are generally not dischargeable?

[debee]

No. Had the property been disposed of via short sale, DIL, or foreclosure it would have been different. Remember, your tax attributes become part of the bk estate as well. The entity gets your loss carryovers, at-risk deductions, method of accounting, etc.

[craigm]

Thank You! And I still assume that I would only see any of my 75K homestead exclusion if in fact the capital gains taxes calculated by the estate were in fact fully paid by the estate (as well as all others in line ahead of the homeowner exclusion) Is that correct?

[debee]

From what I've read, most bankruptcy courts allow the trustee to use your capital gains exclusion. Most, but not all. From what I understand, whether the trustee gets the exclusion or not it should not impact you.

My understanding is that the house will pass into the bankruptcy estate, the bankruptcy estate will be the owner at that point, they will have to pay whatever taxes come due upon sale. If they abandon the house and give it back to you, well then you become responsible for the taxes due on sale/foreclosure.

Your exemption amount will be paid out before the trustee takes his cut. First, the bank gets paid, then you get paid, then the trustee, then the vultures. So regardless of the trustee's tax bill, if there is money above what the bank is owed, you get the first 75K.

[craigm]

That sounds like the IRS loses their capital gains taxes then and this is a great deal for me - If I read your post correctly, I would get 75K, and have no capital gains tax to worry about!

[debee]

Well, my understanding could be flawed. I'm not a CPA. My knowledge is pretty rudimentary.

Is the property jointly or singly owned? Was it ever a rental? Do you think it will sell for 250K (if single) or 500K (if married) over your basis? (Basis generally speaking is purchase price + capital improvements like new roof, new windows, etc).

eta: The IRS will get their taxes if they're due any. The "exclusion" is an exemption from having to pay them. You (or the trustee or both) will be able to exclude 250K or 500K in gain from being taxed at all.

second eta: I've tried to step lightly around the 75K because I'm not sure how it's treated. If the trustee doesn't use all of the capital gains exclusion (if he gets any of it) I'm thinking the unused portion would return to you and cover the 75K, but I don't know that for sure. If you don't trust your CPA, I would get a second opinion.