No Exclusion on Sale of Rent-Controlled Apartment

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Here’s an intriguing scenario that could come up if you live in New York City or some other city with a rent-control law and your dwelling is a rent-controlled or rent-stabilized apartment that you live in as a principal residence. Under the city’s regulations, there are strict limitations on evictions from such apartments.

Your landlord wants to remove you from the apartment and then offer it for rent at the significantly higher market rates or for sale as either a condo or a co-op unit. You yield to the landlord’s blandishments and relinquish your rights under rent control in exchange for a sizable payment.

Understandably, you want to avail yourself of the profit exclusion of as much as $500,000 or $250,000 and thereby escape taxes on the gain from the sale of the right to remain in the apartment. Can you? Emphatically no, say the IRS guidelines for home sellers. “You do not meet the ownership test when you rent an apartment.”

The snag is that, unlike an owner, you never possess the right to sublet, give away, or sell the apartment. You possess nothing beyond the rights conferred by a lease.

Sale of Vacant Land: Complications Abound
The exclusion is available for gain on the sale of vacant land adjacent to a dwelling that you occupy as your main home. To qualify for the profit exclusion, you must satisfy two requirements. First, you own and use the adjacent parcel as part of your main home. Second, you sell the parcel within a period that spans from 24 months before to 24 months after you sell your main home. It makes no difference that you don’t sell your main home at the same time.

The IRS treats the sale (or sales) as one sale. It allows only one exclusion for any gain.
The agency’s regulations include the example of a woman who sold a one-acre parcel that included her home. In a separate deal, she sold 29 adjoining acres of vacant land. She can use the exclusion to erase taxes on the combined gains from the two sales. Presumably, she would also remain entitled to the exclusion if she unloaded the 29 acres in several separate sales.

Refund Claims
What if she sells the land and files her return for that year before she sells the home? She can’t claim an exclusion for the capital gain from the land sale and must declare the gain as reportable income.

What if she then sells the home within the deadline of 24 months and becomes entitled to a refund of the tax paid on the gain from the land sale? She should submit Form 1040X to amend the earlier return and obtain the refund.

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