Investment propertyDo You Own Multiple Homes But No "Principal Residence" For Capital Gains Purposes?
SNOWBIRD ALERT! Is it possible for you to own more than one home but have no “principal residence” for federal capital gains tax purposes? A federal district judge in Arizon has ruled that the answer is yes--and that could be upseting news or the millions of Americans who own multiple houses and hope to pocket tax-free gains when they sell each of them.
The facts of the case in brief: A married couple, the Guinans, owned three different homes at various times during a five year period, 1993-1998. One home was in Wisconsin, another in Georgia and a third in Arizona.
The Guinans generally lived at the Wisconsin home from May to September, and in the Georgia or Arizona home at other times. Over the course of the five years, they could document that they spent 847 days at the Wisconsin property, 563 days at the Georgia home, and 375 days in Arizona.
They sold their Wisconsin home at a substantial profit. But was it eligible for the tax-free exclusion available for qualified “principal residences” under Section 121 of the Internal Revenue Code? On the face of it, the Wisconsin home easily looked like it qualified under the rules: They had owned and used it for far more than the required two years out of the five years preceding the sale. Like many owners, they thought that was sufficient.
Yet U.S. District Court Judge Paul G. Rosenblatt (Guinan et ux v. U.S.) ruled that the Guinans’ Wisconsin home didn’t make the grade. Using a “facts and circumstances” analysis, Rosenblatt concluded that the Guinans had no “principal residence” whatsover for tax purposes, even though they owned three houses and used one more than the others.
Why? Rosenblatt noted that during no year during the five did the Guinans spend a “majority” of their time living in the Wisconsin home, as IRS rules require. Moreover, they could not demonstrate some of the other key indices of principal residence at the Wisconsin home. IRS rules spell out six “facts and circumstances” in particular--the address listed on an owner’s federal and state tax filing, voter registration, auto registration, bills and correspondence, the location of principal banking relationships, and the location of principal social or religious organizations and clubs.
The Guinans lived in their Wisconsin home for extended periods of time, Rosenblatt agreed, but they never filed Wisconsin state tax returns. (They filed either in Georgia or Arizona.) Nor did they ever vote in Wisconsin.
The moral of this story if you are among the estimated one out of 15 American homeowners who own more than one house--especially people with vacation or weekend homes? If you expect to take advantage of the $250,000 (single filers) or $500,000 (married joint-filers) capital gains exclusions, you need to plan your sales carefully. You need more than the minimum , aggregate two years of residency. You need to establish other key “facts and circumstances” that demonstrate one house as your principal residence for tax purposes, any any others as simply additional homes.
In the end, the Guinans were not able to do that, and it cost them $45,000 in capital gains taxes to the IRS.