Monday, January 18, 2010

Real Estate and Income Taxes in the Popular Press: The Principal Residence Exclusion

In last Saturday's Washington Post, Benny Kass emphasizes the importance of understanding the details in the exclusion from federal income tax of proceeds from the sale of a principal residence.

You can link to Kass's article here.


In addition to the mortage interest deduction, a significant tax advantage of owning rather than renting a home (and a cause for much critique by policy scholars on both sides of the political spectrum) is the ability to exclude from income tax the proceeds from the sale of one's home -- in an amount up to $250,000 for a single filer and $500,000 for a married couple.
In order for the exclusion to apply, the house must have been your "principal residence" for at least 2 of the 5 years immediately preceding the sale.

Alas, as Kass explains in his piece, there are two ambiguities in the phrase "principal residence": (1) whether the house is indeed a "residence" and, even if so, (2) whether it was your "principal" residence.

As Kass points out, there is no guidance on the "principal residence" question within the Internal Revenue Code itself.
There is, however, a wealth of guidance in the form of IRS memoranda, letter rulings, Tax Court cases, etc. Not surprisingly, the determination depends on all the facts and circumstances (there's that phrase again!) in a particular taxpayer's case.

If you have questions about your own (and your home's) facts and circumstances, a good starting point is IRS Publication Number 523 ("Selling Your Home"; you can link to the February 2009 version here).

In light of the importance of knowing whether the exclusion applies, a home-seller with lingering questions is well-advised to follow-up on Publication 523 with a discussion with his or her tax advisor or attorney.