Hypothetical Primary residence home sale question

[DNisich]

TX - Is it possible to establish a separate primary residence from that of my wife? If so, would that mean that both she and I could sell a home as a primary residence and take advantage of the capital gains exclusion? I've taken a look at Publication 523 and have located the list of items used to determine one's primary residence. These would be my answers:

Your place of employment. - Would not change

The location of your family members' main home. - Would be different from mine but in the same city

Your mailing address for bills and correspondence. - Would be the new address

The address listed on your:

Federal and state tax returns, Driver's license, Car registration, and Voter registration card.

- I could change all these to the new location

The location of the banks you use. - Would not change

The location of recreational clubs and religious organizations of which you are a member. - Would not change

Would this scenario stand up in an audit?

Given that the capital gains rules for the sale of a primary residence changed quite some time ago, I can't imagine that I am the first person to wonder about this. Perhaps someone has even tried it. If so, does anyone know of any relevant case law that spells out the boundaries on this?What is the name of your state (only U.S. law)?

 

[tranquility]

Um..rather then telling us your conclusion, how about you tell us your facts?

 

[DNisich]

Sorry, thought that was more clear above.....

Maybe this is a better summary:

If I build an home and change a number of documents (voter registration, vehicle registration, utility bills, etc) to reflect that address as my residence, can I sell that home as my primary residence even if my wife and family have a different primary residence?

Perhaps an even better phrasing might be:

Is there a specific list of items that the IRS uses to define what is your primary residence? If all my corroborating documents say one address but I mainly sleep at another address, which one is my primary residence?

 

[tranquility]

It is a facts and circumstances test. Papering over something to gain a tax benefit, if it is not the reality is called tax fraud. Odds are, your plan would succeed as it is often an easy shortcut by the examiner to look only at those documents. Unless it doesn't. If it doesn't, you have a real chance not just be fined, but jailed.

 

[DNisich]

Thanks for the response.

Let there be no mistaking, I would not and will not knowingly commit tax fraud. The purpose of my question is to avoid doing so by fully understanding the law. That being said, I have some follow up questions.

I'm not completely familiar with the "facts and circumstances test" part. Googled it and it seems that it amounts to looking at the whole picture of an individual case. Is this an accurate description of the term?

I gather from the "papering over" bit that you are pretty convinced that the documents with my name and the other address are, by themselves, not sufficient to satisfy the law. Is it because I would not be sleeping there that you have concluded this? Is this the crucial factor?

Can you describe a set facts and circumstances that you believe would satisfy the law?

 

[tranquility]

Um, where do you reside?

 

[FlyingRon]

Are you actually going to live in that house? Despite conducting the illusion by moving all your paperwork to the other house, you still have to live there.
If your wife are separating but not divorcing, this would seem legitimate.
Are you going to file separately?

Note that you each only can apply your individual exclusions to the house you are individually living in.

 

[HomeGuru]

Thanks for the response.

Let there be no mistaking, I would not and will not knowingly commit tax fraud. The purpose of my question is to avoid doing so by fully understanding the law. That being said, I have some follow up questions.

I'm not completely familiar with the "facts and circumstances test" part. Googled it and it seems that it amounts to looking at the whole picture of an individual case. Is this an accurate description of the term?

I gather from the "papering over" bit that you are pretty convinced that the documents with my name and the other address are, by themselves, not sufficient to satisfy the law. Is it because I would not be sleeping there that you have concluded this? Is this the crucial factor?

Can you describe a set facts and circumstances that you believe would satisfy the law?

**A: check IRS website for second home as there are distance and other requirements.

 

[tranquility]

He's not looking for a home mortgage deduction, he's looking for a section 121 exclusion on sale.

Per the Regs. at sec 1.121-1(b)(2), if a taxpayer alternates between two properties, using each as a residence for successive periods of time, the property that is used for a majority of the time during the year ordinarily will be considered the principal residence. This is not conclusive and other facts and circumstances include, but are not limited to:
--taxpayer's place of employment
--address listed on the taxpayer's fed and state tax returns, driver's license, auto registration and voter registration card
--taxpayer's mailing address for bills and correspondence
--location of taxpayer's bank(s)
--location of religious organizations and recreational clubs the taxpayer is affiliated with

In other words, where the taxpayer resides.

 

[DNisich]

Hmmm, it seems that complying with the items on that list is only partially sufficient to claim the exclusion. The "includes but is not limited to" language seems to leave the rule a bit open ended. Apparently, how far apart the two houses are and where you sleep seem to be the most important to the responders so far.

If compliance is a moving target in this regard, I wonder what other people with two houses have successfully done to comply?

Is there some body of publicly available case law that I could read to see what's been allowed and what has not?

 

[tranquility]

The law,

is designed,

to exclude gain,

when you sell your principal residence.

The law,

is not designed,

to exclude speculation income.

Again, the test is a facts and circumstances test. The IRS will try to determine, through the surrounding facts and circumstances what your principal residence is. The test is not the distance between the houses. The test is not where you get your bills. The legal test is to convince the court through all of the information you can provide (along with the information provided by the commissioner) the house you want to exclude is your principal residence that you owned and lived in two of the last five years. If you don't you will get penalties and interest in addition to the amount you owe. If you do things in an attempt to prove a place is your principal residence when, in fact, it is not your principal residence; you risk a tax fraud prosecution.