Principal Residence: What Qualifies for Tax Purposes

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Updated April 23, 2022

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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 lives most of the time.

Key Takeaways

Principal residence describes a person’s primary residence.
When a principal residence is sold, the seller may qualify for a tax exclusion.
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

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):

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.
They did not acquire the home through a like-kind exchange in the past five years.
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.

What Qualifies as a Principal Residence?

A principal residence is the location where a person, couple, or family spends the majority of their time. Under United States tax law, to be deemed a principal residence, one must use, own, or lease a residence for a specified duration.

To be exempt from a $250,000 capital gain or $500,000 gain if filing jointly as a married couple, a principal residence must meet certain qualifications before it is sold.

Primary qualifications include using the home as a primary residence in two of the last five years, it was not acquired through a like-kind exchange in the last five years, and the owner did not sell another property using the tax exception within two years of its date of sale.

Is There a Principal Residence Exemption?

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. For gains that exceed these numbers, capital gains tax is paid.

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 Do You Verify Your Principal Residence?

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

Article Sources

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Internal Revenue Service. “Publication 523: Selling Your Home,” Page 3.
Internal Revenue Service. “Topic No. 701 Sale of Your Home.”
Internal Revenue Service. “Publication 523: Selling Your Home,” Pages 3–4.
Internal Revenue Service. “Publication 527 (2020), Residential Rental Property.”
Internal Revenue Service. "Publication 523 (2021), Selling Your Home."

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