Principal Residence

What Is a Principal Residence?

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

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.

How a Principal Residence Is Determined for Tax Purposes

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 could 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 their 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.

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 elect 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 community. 

The taxpayer must both use and lease or own the residence 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, then the dwelling in which they spend more time would likely qualify as their principal residence. If the taxpayer owns one home but rents another residence in which they live, then 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.