Home Sellers Face Tax Penalties for Poor Records

Pesarik, a real estate manager, faced substantial tax liabilities and penalties after failing to substantiate claims for tax breaks on two home sales totaling $743,800. The court found he did not qualify for the $250,000 principal residence exemption on his Hull, Mass., home, as he lacked sufficient proof of residency for the required two of five years.

Evidence such as out-of-state driver's license, non-Massachusetts tax filings, and low utility usage contradicted his claim, leading to a taxable gain of $137,083. Furthermore, Pesarik's claim for increased cost basis due to $82,000 in improvements on his Wakefield, N.H., property was largely denied due to inadequate record-keeping. Vague credit card statements and an unhelpful spreadsheet resulted in a higher taxable gain of $118,198.

While the "Cohan rule" offered a minor reprieve, allowing a $14,800 deduction despite poor records, Pesarik also incurred a 20% accuracy penalty for negligence and substantial understatement of tax. This case underscores the IRS's scrutiny and the imperative for meticulous documentation of residency and capital improvements to secure legitimate tax benefits.