Poor records will cost you precision, and claiming the §121 principal residence exclusion without objective proof will fail.
Holding
The Tax Court allowed a limited increase to the basis for renovation costs on one property using an estimate under Cohan, but denied the §121 exclusion for a second property and sustained the §6662 substantial understatement penalty.
Why It Matters
The case shows the practical limits of Cohan. The Court will estimate the basis, but it will heavily discount unsupported allocations.
The §121 principal residence exclusion requires objective, contemporaneous evidence. Mailing addresses, licenses, and tax filings matter.
Owning multiple properties increases the substantiation burden when allocating renovation expenses.
A belief that a property sale produced a loss, without calculation or documentation, will not support reasonable cause under §6664(c).
Key Facts
Jeffrey Pesarik sold:
Wakefield, NH, property for $187,000 in March 2020.
Hull, MA property for $556,800 in Oc…
