Let's say you own more than one home. Which of them, for the purposes of taking the allowed $500,000 gains exclusion on sale of the home ($250,000 if you're not married), is your personal residence?

This can totally throw you, as it did a Mr. and Mrs. Guinan, who live in... well, their home in Wisconsin, their home in Georgia, and their home in Arizona. As it happened, they sold their Wisconsin home, assuming that the IRS would see it as their primary residence, and attempted to bypass a large amount of potential capital gains taxation, primarily because they lived in their Wisconsin home a bit more than they did in the other two homes.

The IRS, though, has a "facts and circumstances" analysis, which U.S. District Court Judge Paul G. Rosenblatt (in Guinan et ux v. U.S.) called upon, and the judge decided the Guinans, amazingly, simply had no principal residence, for tax purposes. It turns out they had never paid state taxes in Wisconsin, had never voted in a state election, had done few of the things that would identify their Wisconsin home as their principal residence. So the judge said they owed the IRS $45,000 in capital gains taxes.

This is an error all owners of multiple residences can fairly easily avoid. Consult with your tax advisor. Make certain the signs leading to your principle residence are clear for the IRS to see. For expert real estate assistance call Beth at (425) 450-5208 and visit her website at www.bethbillington.com.

Beth Billington is a Realtor® with Coldwell Banker Bain in Bellevue, WA.