What Is a Principal Residence?

A principal residence is the primary location where a person inhabits. It is also termed to as a primary residence or main residence. It does not matter if it’s a house, trailer, apartment, boat, or villa as long as it’s the primary residence of an individual, couple, or family.

• Principal residence defines a person's primary residence.

• When a principal residence is sold, there is a chance for the seller, that the seller may qualify for a tax exclusion.

If the taxpayer maintains multiple residences and divides their time between them on a seasonal basis, the dwelling in which they spend the majority of their time would likely qualify as their principal residence.

Understanding About Principal Residence

Ownership of a property does not automatically qualify it as a primary residence. Adding furniture and other personal belongings to a dwelling does not necessarily qualify it as a primary residence. To meet certain tax requirements, the taxpayer must use and lease or own the residence for a minimum period of time.

How to Determine a Principal Residence for Tax Purposes

In the majority of instances, taxpayers must report capital gains from the sale of any property. However, if they meet the following Internal Revenue Service (IRS) requirements, they may be eligible to exclude a $250,000 gain (or $500,000 if married and filing jointly) when they sell their primary residence:

1. They owned the home for at least two of the five years preceding the sale and lived there as their primary residence.

2. They did not acquire the home through a like-kind exchange within the previous five years.

3. They did not exclude the gain from the sale of another home two years prior to this sale.

Although absences for vacation or long-term medical care do not affect the status of a primary residence, protracted lack of occupancy for other reasons may disqualify it.

A person may choose to suspend the five-year test for up to ten years if he or she is on qualified official extended duty in the uniformed services, Foreign Service, or intelligence community.

To meet certain requirements, the taxpayer must use and lease or own the residence for a minimum period of time.

If the taxpayer maintains multiple residences and divides their time between them on a seasonal basis, the dwelling in which they spend the majority of their time would likely qualify as their principal residence. If the taxpayer owns one residence but rents another residence in which they reside, then the rented property is their primary residence.

Other forms of evidence may be required to establish a person's primary residence. This can include utility bills with the occupant's name and address, a voter registration card, or a driver's license with the address.

Mobile homes, apartments, and boats may qualify as primary residences if they contain sleeping quarters, a bathroom, and a kitchen.

What Qualifies as the Principal Residence?

A person's, couple's, or family's primary residence is where they spend the majority of their time. To be considered a principal residence under United States tax law, one must use, own, or lease a residence for a specified period of time.

Prior to its sale, a principal residence must satisfy certain requirements to be exempt from a $250,000 capital gain or a $500,000 gain for married couples filing jointly.

Primarily, the home must have been used as a primary residence for two of the preceding five years, it cannot have been acquired through a like-kind exchange in the preceding five years, and the owner cannot have sold another property using the tax exemption within the preceding two years.

Is There any Principal Residence Exemption?

Individual homeowners are exempt from paying capital gains tax on the first $250,000 of a property's sale value, while married couples are exempt on the first $500,000 of gains. Gains that exceed these thresholds are subject to capital gains tax.

What Is 2 Out of 5 Year Rule?

For a home to qualify as a principal residence under United States tax law, it must meet the two-out-of-five-year rule. This means that a person must reside in the home for a total of two years, or 730 days, over a five-year period. This rule applies to married couples who file jointly, as well.

How to Verify Your Primary Residence?

Utility bills, driver's licenses, or voter registration cards can be used to verify a primary residence. It may also be determined by tax returns, vehicle registration, or the residence closest to your place of employment.