Homeowners aiming to secure significant capital gains tax breaks when selling their primary residence should carefully establish and document their residency status, tax experts advise. For individuals who own multiple properties, clearly designating one home as their principal residence is essential to qualify for exclusions permitted under U.S. tax law.

Under IRS rules, single filers who sell their primary residence may exclude up to $250,000 of capital gains from taxable income, provided they have lived in the property for at least two of the five years preceding the sale. However, individuals who have claimed this exclusion on another property within the prior two years are ineligible to use it again.

Establishing a property as a primary residence requires demonstrating that it is where the taxpayer spends the majority of their time, generally more than six months a year. Experts emphasize the importance of compiling a variety of supporting documentation, since no single factor definitively establishes residency. According to William D. McCracken, a partner at Moritt Hock & Hamroff, residency determination relies on a combination of indicators rather than one conclusive piece of evidence.

In New York City, this issue has garnered increased attention partly due to the city’s recent introduction of a pied-à-terre tax targeting owners of luxury second homes. The proposed local rules outline criteria that can prove residency, which may also facilitate federal tax claims. Examples include listing the city address on state and federal income tax returns, maintaining a driver’s license at that address, and possessing a voter identification card issued by the city’s Board of Elections.

Even if vehicle use remains primarily outside the city—such as keeping a car registered upstate—tax advisors suggest registering the car in the city as additional proof of residency. Maintaining records of daily expenditures in the city and ensuring bank accounts reflect the city address can further strengthen the taxpayer’s position.

Louis Tuchman, a partner and chair of the tax department at the law firm Herrick, recommends taking multiple steps to establish residency, underscoring the high stakes involved in capital gains calculations. “The stakes are high enough to take as many steps as you can to ensure the result you want,” he said.

Taxpayers considering selling a Manhattan co-op or other city property while maintaining residences elsewhere may benefit from careful planning and thorough documentation to maximize available tax benefits and withstand potential scrutiny.