Filing Tax Amendments - Common Mistakes

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In today's show Sanjiv Gupta CPA talks about the rally of GameStop, California Budget Surplus & Federal Aid, Unemployment Benefits.  Please note this is a transcript of radio show aired on May 26th, 2021.  You should not take any information as Tax Advise. We strongly recommend that you speak with your CPA or accountant to discuss your specific tax needs.


Your Tax Question: (6:00)


I have a have a question regarding selling house and taking advantage of find that gig in which you get from capital gains, if you sell within the the two years residency road. Right?  So the rule says you have to be resident at least two years within last five years. And ownership has to be around the same to yesterday in the last five years. 


I have a question regarding property, which have been been the primary property, but I have left it in rental as a rental for last three and a half years. Which basically last four years, if it exceeds that, you know, criteria of two years. So the question was around, is there any way to get the partial exclusion of the game, maybe prorated? 

Let's say 18- 24 months, kind of a no ratio in this scenario.


Sanjiv Gupta CPA (6:31)

So correct me if I understand this question, or if I'm wrong, understand this. So you have an intro property. And you were living in a town that but then you convert to rental property, and three years, three and a half years passed by? Since the conversion to rental property? Right. 

Ok, so you have converted rental property into primary residence?  Yes. So just to benefit for the listeners. So to understand this question in about a broader way. 


So if your primary residence any own and use that primary residence for two out of five years, you can get the exclusion of gain up to half a million dollars meant filing joint. And if you're single, you can get desperation up to $250,000. This is as per the section 121 of IRS tax code. Now, if you convert that real estate, a primary residence into rental, you have to calculate the three years, two out of five years from the date you move from that day, from the day move out to the date of selling selling of that home, if that period exceeds three years from the date, you rent that property, which you were living earlier, then you are you're out of luck, to get exclusion of gain, because it has three years period goes out here two years, you have to live in it three years, you don't have to live in it. But it's a block of five years from date of sale. 


So if we exceed that three years period, you're out of luck, you don't get the exclusion. 


Now, what is the way out of doing that, the way out of doing that is you can go back to that property, you can start living in that property for two, two years more. And if you do that, you will get declaration for it. As soon as you have the gain. Now, if you can't live in, if you can't go back and say I don't want to go back and stay in that maybe smaller home or maybe in a different location. And you don't want to go back you want to sell it. Of course, you will not get the gain exclusion. But you can do other things like your tentative exchange, you can do qualified opportunity Funds investment, you can do look into other tax planning opportunities out there. But you will be out of luck because you exceeded the three year period from the end of the from the date that that property was converted to rental properties. So in your case, you exceeded the three year limit. So you're out of luck, basically, you have to look at other options of doing 1031 of our qualified opportunity funds. 


Let's discuss amendments (9:45)


What about those amendments for them? What happens? Why this tax amendment come in? Sometimes we receive a notice from the IRS or FTB? Well, by the way, FTB does not send too much. It just wakes up after a certain time. Why do I have to be late because they want to make you pay more interest in penalties. And they don't want to give a notice immediately they wait they wait. But I sent you notice immediately. 


So when you receive a notice the notice can be CP 2000.  So when you receive those notices that notice will tell you,  you missed this reporting , or miss this interest reporting transaction, or you missed K1 from this entity. So you wake up and you've now only know what happened.  But you don't look what he notices is the time not to get fearful? Is it time to report it properly? What you missed out. That's why the amendments is important. Though it will tell you the notice will tell you what things you missed out how to report it back. And what the consequences if you don't report it back. So it's important to file an amendment. If you receive that notice, amendment is 1040x is file in that form. And we report all the things that we missed out and then whatever the result can be it can be it can be more tax to you with interest and penalty. And it can be a refund. If you missed out a valuable deduction, you might go back and start looking at other things which you might missed out. For example, you might have missed out reporting an expense on a schedule C you're have a schedule C sole proprietor running a business, you might bought a car last year, well COVID you can say Why? Well, you never know. You might bought a car last year. And you know you forgot to take a regular deposition on recorder computers. People bought computers left and right. By the way do we know in COVID become booted up the stores for out of out of supplies for computers. A lot of things were out of supply last year, even the gym machines were out of supply last year. So computers were also there last year out of supply. So if you bought those computers and you're not taking depreciation or car depreciation, maybe you can do that when you file this amendment and claim the refund.


 So it's That point where you don't not only report the things that you missed out, but also report the things that you can give that you that you want to become compliant with respect to the notice and do it properly. Now, the tax amendments are not subject to an audit is not an audit, remember that it's not an order people say, oh, amendment Sorry, no. The problem with tax amendment is, it takes time for the IRS to process this returns, okay? It's not immediate. If you're getting a refund, it's not that you're going to get the refund immediately, within two weeks or three weeks, like you do when you do original return filing, you get a refund, maybe two weeks or three weeks in your in your bank account. 


A problem here happens is some clients keep calling saying hey, I don't get to refund in my account. You promised me two weeks, three weeks What happened? I don't see it. The problem is not with us. The problem is with the IRS processing system. Remember, IRS is working day and night to help millions of people process a lot of stimulus payment, a lot of returns a lot of child tax credit payments and processing other things. It will take a lot of time it takes some time the systems are systems from all the technical people who are listening, they know how, when this overload of so much thing on the system, it might it takes time slows down. So just be patient. 


So if you don't see those checks in your refund in your bank account, assuming that refund will not come it will come just keep checking on the irs.gov website. So when you do the amendment, and use, it will take normal amendment processing takes about six weeks to maybe three months to six months, and refund will come later on. In the meantime, if you might receive a notice from the IRS saying a file an amendment, we received amendment. But we are not able to process the amendment. Because of maybe I'm missing a document, maybe an AMT calculation document like form 6251. Or maybe I need more information about certain kind of deduction of claim. So provide those in those documents. And remember it anything that you receive from IRS takes at least three months to process.


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