What is a Principal Residence?

A very recent New York District Court decision (Cohen v. U.S., 2/28/14) provides a lot of good narrative for taxpayers wondering how Internal Revenue Code Section 121 (Exclusion of Gain From Sale of Principal Residence) truly works.  The taxpayers here sought a refund of taxes paid arising from the sale of certain real estate which they claimed was their principal residence, albeit the facts of the case included complications related to the use of the property by children and other family members.

Indeed, the Court notes “The central question in this case (is):  whether (the property) was used by the Cohens as their ‘principal residence’ during the period David and Nicole (son and daughter-in-law) were living there,” and the fact that the regulation discussing this term sheds little light on how it should be interpreted, providing only that whether property is used by a taxpayer as his principal residence depends upon all of the surrounding facts and circumstances.

The Court goes on to state that it is not “aware of any cases that discuss the term in factual circumstances similar to what has been presented here.”

Unfortunately, the taxpayers’ arguments were insufficient to carry the day in this case (to include securing the government’s agreement that the accuracy-related penalty should not apply).  But the discussion will be enlightening to folks whose living arrangements may not be quite so clear-cut relative to whether the Section 121 exclusion may be available to them.