Legal Question in Real Estate Law in California

To answer your question directly, you cannot go into court to change your taxes. You must correctly report your taxable transactions and the tax is what it is. If your accountant tells you there is some "interpretation" available in how you report the numbers, you can take an agressive or conservative approach. If you take the agressive approach and the IRS disagrees, THEN you can go to court for a determination of whether you and your accountant's interpretation is right or the IRS interpretation. That is the only way to get into court: report it as you think is correct with the assistance of an accountant, and then see if the IRS disagrees.

You really need to talk to an accountant about this, not a lawyer. The accountant will tell you if you need a tax lawyer involved, but it is highly unlikely.

Not sure why you were told to wait until you were 55 to sell, unless they thought you could transfer your property taxes. If you had sold withing 3 years after you had moved out of the first house, you probably could have claimed the primary residence exemption, which would have avoided capital gains. Your capital gain is the difference between what you pay for a property and what you sell the property for, minus cost of sales and any improvements. You need to talk to an accountant or tax attorney who is familiar with these issues. There could be a way to avoid the gains, but it would take some time.

I can tell by your long rambling post and poor grammar that you do not teach English. My guess is woodshop. If you don't want to pay capital gains tax, some people do a 1031 tax free exchange. I suggest talking to a real estate attorney, or a tax professional. Other than deductions for mortgage, which should have been taking all along, the fact that the property has depreciated in value is not a defense to the fact that you made some capital gains.

Although your facts are a little hard to follow, I think there's a pretty good chance that if you sit down with a tax advisor who has a good familiarity with the tax rules regarding capital gains on residences and income property, you can come up with enough deductions and offsets to show an overall reportable loss without having to bend the truth at all. Good luck.