Arizona man sold two homes for $744K — then lost in court and owed taxes on $255K. What every seller must know

Selling a location tin travel with 1 of the astir generous taxation breaks successful the U.S. taxation codification — but a caller Tax Court ruling is simply a crisp reminder that this isn’t existent successful each situation.

In Pesarik v. Commissioner, a real-estate manager sold 2 properties successful 2020 for a combined $743,800 (1) — properties he’d primitively paid $424,750 for, and connected which helium believed helium owed nary taxation gains, according to a Wall Street Journal story.

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Tax Court Chief Judge Patrick Urda ruled otherwise: Jeffrey Pesarik owed taxes connected $255,281 of unreported income, positive punishment and involvement charges. He had failed to beryllium 1 location qualified arsenic his main residence, and besides didn’t substantiate overmuch of the claimed betterment ground of the other.

The lawsuit shows what tin hap erstwhile sellers presume they suffice for taxation breaks they haven’t really earned oregon documented.

Many sellers “assume the IRS won’t inquire questions,” CPA Eric Bronnenkant of Edelman Financial Engines told the Wall Street Journal (2).

The home-sale exclusion nether Section 121 of the taxation codification lets qualifying sellers exclude up to $250,000 of nett from a location merchantability if filing single, oregon up to $500,000 for joined couples filing jointly. It’s a important break, but it comes with strict conditions (3).

According to the IRS, to qualify, you indispensable person owned and lived successful the location arsenic your superior residence for astatine slightest 2 of the 5 years instantly earlier the sale. You tin lone assertion it erstwhile each 2 years. If you ain much than 1 home, the IRS specifies the exclusion applies lone to your main residence — not a abrogation home, rental, oregon concern spot (4).

While Pesarik satisfied the ownership timeline connected his Massachusetts home, the occupation was proving it was really his main home.

The justice noted helium had nary Massachusetts taxation filings oregon in-state driver’s license, and his recognition paper bills went to a P.O. container successful New Hampshire. The driver’s licence helium utilized for ID was from Arizona. Utility usage didn’t found accordant Massachusetts residency. So, the tribunal denied the exclusion, costing him a taxable summation of implicit $137,000 connected that spot unsocial (2).