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.

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 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.

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. 

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.

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.