Benny Kass' article "Avoid Losing Your Principal Residence Benefit" (Aug. 19), while correctly stating the law on the tax consequences of the sale of a principal residence, fails to emphasize that his example of a rental property retaining its status as a principal residence constitutes the exception rather than the rule.
The "roll-over" benefits of IRS Code Section 1034, which enable a taxpayer to defer the gain when his residence is sold and a new one purchased within two years (or, as in Kass' example, a new house is purchased and the old one subsequently is sold) apply only to one's principal residence.
When a person vacates his primary residence and puts it on the rental market, this ordinarily will change the character of the property from a residence to a business property, no longer qualifying for the deferred gain when the house is sold.
Kass points out that only after making a good-faith effort to sell the residence after buying a new one will the tax laws protect the seller's right to defer his gain. However, efforts to sell the house must be very carefully documented, since once the residence is put on the rental market, the residential character and tax benefit that go with it are suddenly subject to challenge by the IRS.
The ultimate determination of whether the property has lost its residential character depends on the facts and circumstances of each case, and the burden of proof is on the taxpayer, thus, documenting efforts to sell are critical.