Principal Residence: What Qualifies for Tax Purposes?

What Is a Principal Residence?

For tax purposes, a principal residence is the dwelling that a person inhabits most of the time. It does not matter whether it is a house, apartment, trailer, or boat, as long as it is where an individual, couple, or family lives most of the time. It is also referred to as a primary residence or main residence.

For taxpayers that own multiple properties, only one can be considered the principal residence.

Key Takeaways

  • If a taxpayer maintains more than one residence and divides their time between those residences, the dwelling in which they spend more time would likely qualify as their principal residence.
  • When a principal residence is sold, the seller may qualify for a tax exclusion on the profit.
  • Proof that it was the taxpayer's principal residence may be required.

Understanding Principal Residence

Ownership of a property in and of itself does not mean it is a principal residence. What’s more, putting furniture and other personal effects in the dwelling does not necessarily qualify it as a principal residence.

For tax purposes, the taxpayer must both use and lease or own the residence for a minimum duration to meet some of the qualifications.

In most cases, taxpayers must file taxes on capital gains from the sale of any property. However, when they sell their home of primary residence, they qualify for an exclusion of a $250,000 gain ($500,000 if married and filing jointly) if they meet the following requirements, according to the Internal Revenue Service (IRS):

  1. They owned the home and used it as a primary residence for at least two of the five years preceding the sale of the property.
  2. They did not acquire the home through a like-kind exchange in the past five years.
  3. They did not exclude the gain from the sale of another home two years prior to the sale of this home.

Proving a Principal Residence for Tax Purposes

While absences from the home for vacation or long-term medical care do not affect the standing of a principal residence, protracted lack of occupancy for other reasons may disqualify it.

Some examples that can allow someone to suspend the five-year test for up to 10 years include being on qualified official extended duty in the uniformed services, the foreign service, or the intelligence service.?

The taxpayer must both use the residence and lease?or own it for a minimum duration to meet some of the qualifications.

If the taxpayer maintains more than one residence and divides their time on a seasonal basis between those residences, the dwelling in which they spend more time would qualify as their principal residence. If the taxpayer owns one home but rents another residence in which they live, the rented property would be their principal residence.

Other types of proof may be required to establish where one’s principal residence is. This can include utility bills with the occupant’s name and address, a driver’s license with the address, or a voter registration card.

Mobile homes, apartments, and boats can potentially qualify as primary residences, but only if they are equipped with sleeping space, a bathroom, and a kitchen on the premises.

Can You Have More Than One Principal Residence?

For tax purposes, you can only have one principal residence. Under United States tax law, a taxpayer must use, own, or lease a residence for a specified duration for it to be deemed a principal residence. The home must have been used as the taxpayer's primary residence in two of the last five years. If you have claimed a tax exemption for a previous residence within the last two years, you cannot claim an exemption on a new principal residence, even if it is now your main home.

What Is the Tax Exemption for a Principal Residence?

Individual owners of a home do not have to pay capital gains on the first $250,000 of value sold on a property, while married couples are exempt from paying capital gains tax on the first $500,000 in gains. Capital gains tax is owed for gains that exceed these numbers.

What Is the 2 Out of 5 Year Rule?

Under United States tax law, for a home to qualify as a principal residence, it must follow the two out of five year rule. This means that a person must live in the residence for a total of two years or 730 days combined out of a five-year period. This rule also applies to married couples filing jointly.

How Can I Verify My Principal Residence?

A principal residence can be verified through utility bills, a driver's license, or a voter registration card. It may also be proved through tax returns, motor vehicle registration, or the address closest to your job.

The Bottom Line

Most of us have little trouble identifying our principal residence. It's where we live, at least most of the time.

You may be required to prove it from time to time, if you have a second home or spend a great deal of your time elsewhere. Most importantly, the question could come up when you're reporting a capital gain from the sale of your principal residence and you qualify for the hefty exclusion from taxes that comes only with the sale of a principal residence.

Proving it should be a straightforward matter, however. A voter registration card or driver's license, a series of tax returns mailed to you at that address, or utility bills directed to you all indicate your principal residence.

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  1. Internal Revenue Service. “Publication 523, Selling Your Home,” Page 3.

  2. Internal Revenue Service. “Publication 523, Selling Your Home,” Pages 3-6, 11.

  3. Internal Revenue Service. "Topic No. 409, Capital Gains and Losses."

  4. Internal Revenue Service. “Publication 523, Selling Your Home,” Pages 3–4.

  5. Internal Revenue Service. “Topic No. 701, Sale of Your Home.”

  6. Internal Revenue Service. “Publication 527, Residential Rental Property," Page 17.

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