A principal residence is a primary location that a person inhabits. 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.
Breaking Down Principal Residence
Ownership of a property in and of itself does not mean it is a principal residence. Likewise, 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 exclusion of a $250,000 ($500,000 if married filing jointly) gain if they meet the following requirements according to the IRS (2017):
- They owned the home and used it as their primary residence in 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. For example, if the home is left vacant for more than one year because the owner is spending that time elsewhere on a sabbatical or an extended commitment for work, that time may not count towards the use requirement for tax purposes.
If the taxpayer maintains more than one residence and divides their time on a seasonal basis between them, the dwelling they spend more time in would likely qualify as their principal residence. If the taxpayer owns one home but rents another residence they live in, 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, bathroom, and a kitchen on the premises.