Curiously, Section 121 of the Code — the governing authority for the exclusion — doesn’t define the term ”principal residence.” Rather, it simply requires that during the 5-year period ending on the date of the sale, the taxpayer must have owned and used the home as the taxpayer’s principal residence for periods aggregating 2 years or more.
This analysis is straightforward when a taxpayer calls one place home over the two year period preceding the sale. But what if the taxpayer was a big wheel down at the cracker factory, earning enough to retire early and live out his days splitting time between luxury homes in Beverly Hills and Aspen? Which one is his primary residence?
The regulations at Treat. Reg. Section 1.121-1(b)(2) provide the necessary guidance:
In the case of a taxpayer using more than one property as a residence, whether property is used by the taxpayer as the taxpayer’s principal residence depends upon all the facts and circumstances. If a taxpayer alternates between 2 properties, the property that the taxpayer uses a majority of the time during the year ordinarily will be considered the taxpayer’s principal residence. In addition to the taxpayer’s use of the property, relevant factors in determining a taxpayer’s principal residence, include, but are not limited to—
- The taxpayer’s place of employment;
- The principal place of abode of the taxpayer’s family members;
- The address listed on the taxpayer’s federal and state tax returns, driver’s license, automobile registration, and voter registration card;
- The taxpayer’s mailing address for bills and correspondence;
- The location of the taxpayer’s banks; and
- The location of religious organizations and recreational clubs with which the taxpayer is affiliated.
In Wickersham v. Commissioner, 2011-178 (7.28.11), the Tax Court was asked to analyse these factors to determine whether the sale of the taxpayers’ Iowa residence qualified for the Section 121 exclusion. The scrutiny was necessitated because the Wickershams – apparently thirsting for more excitement and adventure then the Hawkeye State had to offer — also spent time at a second home in Omaha, Nebraska.
Complicating the analysis was inconsistent reporting by the Wickersham’s on their federal and state tax returns. The federal returns from 2001-2005 used the Nebraska mailing address, while the 2005 return used the Iowa address. In addition, the Wickersham’s filed Nebraska resident state income tax returns in 2002 and 2003 (presumably to qualify for a liquor license owned by the couple which was available only to Nebraska residents), but Iowa resident returns in 2001, 2004 and 2005.
In its decision, the Tax Court looked past the inconsistent tax return reporting and determined that the majority of the factors indicated that the Iowa home was the Wickershams’ principal residence. The court cited the following:
- Wickersham’s hosted the majority of their personal and family events and obligations in Iowa;
- Mr. Wickersham received cancer and hernia treatment in Iowa;
- The Wickersham’s 28 children and grandchildren resided in Iowa;
- The Wickersham’s doctors, lawyers, and bookkeepers were located in Iowa
- After the Wickersham’s sold their Iowa home, they purchased their replacement home in Iowa, an indication that the taxpayers’ never intended to permanently reside in Nebraska.
* for MJF, $250,000 for single taxpayers