Principal Residence Home Sale Exclusion: 7 Ways to Prove It

What Happened in Pesarik v. Commissioner?

In Pesarik v. Commissioner, T.C. Memo. 2026-20 , the taxpayer sold two properties during 2020.

He sold a property in Wakefield, New Hampshire, for $187,000. Several months later, he sold a property in Hull, Massachusetts, for $556,800.

He did not report gain from either sale on his federal income tax return.

The IRS learned about the sales through third-party reporting and issued a notice showing $271,774 in additional income tax and a $54,355 accuracy-related penalty.

Those were the amounts in the original notice. They were not necessarily the final amounts because the Tax Court later changed part of the gain calculation.

The taxpayer argued that renovation costs increased his basis in the New Hampshire property. He also argued that the Massachusetts property was his principal residence and qualified for the Section 121 exclusion.

The court allowed some improvement costs for the New Hampshire property.

But the principal-residence argument failed.

The court found that he had not proved the Massachusetts property was his main home for the required period.

Why the Arizona Driver’s License Mattered

The taxpayer bought the Massachusetts property in July 2018 and sold it in October 2020.

That timing left little room. To satisfy the general two-year use requirement, he needed to show that the property became his principal residence almost immediately.

The evidence did not clearly establish that.

He had an Arizona driver’s license and never obtained a Massachusetts license. He did not file Massachusetts income tax returns for 2018, 2019, or 2020.

His 2020 federal return listed a post office box in Portsmouth, New Hampshire. Many credit card statements continued going there until early 2020.

How the Principal Residence Home Sale Exclusion Works

Section 121 may allow an eligible individual to exclude up to $250,000 of gain from the sale of a principal residence.

Certain married couples filing jointly may qualify for an exclusion of up to $500,000. The higher amount has additional requirements and is not automatic.

The exclusion applies to gain, not the sale price.

Technically, qualifying selling expenses reduce the amount realized. You then subtract adjusted basis to determine the gain.

To qualify for the full exclusion, you generally must own the property for at least two years and use it as your main home for at least two years during the five-year period ending on the sale date.

The two years do not always need to be continuous. The ownership and use periods also do not have to be exactly the same.

You generally cannot use the exclusion if you claimed it for another home sold during the previous two years, although exceptions may apply.

The IRS explains the rules in Publication 523, Selling Your Home .

IRSProb also explains the home-sale exclusion rules .

What If You Own More Than One Home?

You can own more than one residence. You may spend weekdays in one house and weekends in another, divide your time between states, or work remotely from several locations.

But you generally have only one principal residence at a time for the home-sale exclusion.

When you regularly use two homes, the property used for most of the year ordinarily will be considered the principal residence. Other facts can also matter.

You cannot simply choose whichever property produces the best tax result after it is sold.

If you split your time between properties, your records should help show where your daily life was actually centered.

7 Ways to Prove Which Property Was Your Principal Residence

1. Show Where You Spent Your Time

Actual use matters. A calendar can help, especially when supported by travel records, toll statements, appointments, receipts, bank transactions, or phone location information.

In Pesarik, there was no clear record showing how much time the taxpayer spent at each property.

2. Review Your Driver’s License and Vehicle Registration

A driver’s license does not settle the issue by itself. But it is an official record connecting you to a state and address.

If your license says Arizona while you claim Massachusetts was your main home, the IRS may reasonably ask why.

There may be a good explanation. It becomes harder to support when your tax returns, registrations, and mailing addresses also point somewhere else.

3. Check Government Records

Voter registration, state tax filings, government benefits, licenses, and permits may help establish where you considered your main home.

Records created before an IRS dispute can be more persuasive than statements prepared after a notice arrives.

4. Compare Tax and Mailing Addresses

The addresses on your federal and state tax returns matter.

So do addresses used for bank statements, credit cards, insurance, medical accounts, and other regular correspondence.

A mailing address does not prove where you lived by itself, but years of records pointing to another state may raise questions.

5. Gather Utility and Household Records

Electricity, water, gas, internet, and other household records may help show whether a property was regularly occupied.

But active utilities are not enough by themselves. A vacation home can still have electricity and water.

In Pesarik, the taxpayer's electric-bill information did not clearly establish whether the Massachusetts property was his main home or another residence.

6. Document Where Your Daily Life Was Centered

The IRS may also consider:

• Your place of employment
• Where close family members live
• The location of your banks
• Community or religious involvement
• Recreational memberships
• Doctors and regular service providers

Not every factor applies to every taxpayer. The goal is to show where your day-to-day life was centered.

7. Keep Insurance and Occupancy Records

Homeowners insurance may identify the property as a primary residence, second home, or rental.

Moving bills, furniture deliveries, change-of-address confirmations, homestead filings, leases, and occupancy records may also help.

In Pesarik, the court noted the lack of evidence showing a move to Massachusetts, such as hiring movers or purchasing furniture.

That does not mean those exact records are required. They were examples of evidence that might have supported the taxpayer's story.

Why One Document May Not Decide the Case

A driver’s license is evidence, but it is not the entire case. The same applies to a voter registration card, utility bill, or tax-return address.

A conflicting record may have a reasonable explanation. You might use a stable mailing address while traveling or keep an old license briefly after moving.

The important question is whether all the records fit together into a believable timeline.

Residency Was Not the Only Problem in Pesarik

The case also shows why home-improvement records matter.

The taxpayer bought the New Hampshire property for $30,000 and sold it for $187,000. He claimed more than $82,000 in improvements.

He provided credit card statements, bank records, testimony, and a spreadsheet. But many expenses were not clearly connected to a specific property.

The court believed renovations occurred but did not accept the full amount claimed.

It estimated $20,959 in capital improvements. After considering the purchase price and selling costs, the court calculated a $118,198 gain on the New Hampshire property.

It calculated a $137,083 gain on the Massachusetts property.

Together, the court found $255,281 of unreported income from the two sales.

The final tax and penalty amounts still had to be recalculated after the court's findings, so the $54,355 penalty in the original IRS notice should not be treated as the final amount.

How Adjusted Basis Changes Your Gain

Your starting basis is often what you paid for the property. Special rules may apply to inherited property, gifts, divorce transfers, and other transactions.

Certain purchase costs and capital improvements may increase basis.

Examples may include:

• Adding a room
• Replacing the entire roof
• Installing a new heating system
• Building a permanent deck
• Adding central air conditioning
• Replacing major plumbing or electrical systems

Ordinary repairs and maintenance generally do not increase basis by themselves.

Basis may also need to be reduced for depreciation and certain other adjustments.

If improvement records are missing, try to rebuild them using bank statements, invoices, permits, photographs, contractor emails, store histories, warranties, and appraisals.

The evidence still needs to connect the expense to the correct property.

Publication 551 explains the general basis rules.

Do You Still Need to Report the Sale?

You generally must report the sale if you receive Form 1099-S, even when the entire gain is excludable.

You also must report it when you cannot exclude all the gain.

Individuals commonly use Form 8949 and Schedule D when reporting is required. The exact treatment depends on the circumstances.

IRS Topic 701 explains the basic reporting rules.

If the IRS believes income was omitted, IRSProb's guide to a CP2000 notice for possible unreported income may also help.

What If You Moved Out Before the Sale?

You do not always need to live in the property on the day it is sold.

You may move out, rent the home, and sell it later while your earlier residence period remains within the five-year window.

A rental period after your last use of the property as your principal residence generally is not treated as nonqualified use for this rule.

However, depreciation allowed or allowable for rental or business use after May 6, 1997, may still create taxable gain.

Rental or other nonresidential use before the home became your principal residence can produce a different result and may cause part of the gain to remain taxable.

IRSProb's guide to tax surprises when selling a vacation home explains related issues.

What to Do Before Selling When You Own Two Homes

Before closing:

1. Create a five-year timeline showing where you lived.
2. Count the time spent at each property.
3. Review licenses, registrations, and official addresses.
4. Gather utility and household records.
5. Find original purchase documents.
6. Organize improvement costs by property.
7. Review rental or business use.
8. Calculate adjusted basis and selling expenses.
9. Check whether you used the exclusion during the previous two years.
10. Ask a tax professional to review unclear facts.

What If the IRS Questions Your Home Sale?

Start with the notice and determine exactly what the IRS is questioning.

The issue may involve unreported proceeds, missing basis, principal-residence eligibility, or several issues at once.

A strong response may include:

• A clear timeline showing where you lived
• A complete gain calculation
• Proof of ownership and use
• Purchase and improvement records
• Closing documents
• An explanation of conflicting addresses
• Rental and depreciation records

Do not send the IRS an unexplained stack of documents. Match each record to the point it supports.

IRSProb provides help with IRS audits and tax examination problems .

You can also review what to check before responding to an IRS audit letter .

Frequently Asked Questions

Your Records Should Tell the Same Story You Do

The lesson from Pesarik is not that one out-of-state driver's license destroys the home-sale exclusion.

The lesson is that your claim needs support.

If you own several properties, keep a clear record of where you lived and how each property was used. Save your purchase documents, improvement records, utility information, and closing statements.

When the time comes to sell, your records should tell the same story you do.

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