Principal Residence: What Qualifies for Tax Purposes? (2024)

FAQs

Principal Residence: What Qualifies for Tax Purposes? ›

Establishing a property as your principal residence means you must spend the bulk of your time there, whether the dwelling is owned or rented. Ownership itself does not make a property a principal residence.

If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a "facts and circ*mstances" test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well.

A primary residence is one that you occupy for the majority of the year and use as your permanent address on documents like your driver's license and tax returns. A primary mortgage loan is used to finance a primary residence. A second home is a property that you own but do not occupy most of the year.

Qualified principal residence debt is any debt incurred by the borrower to purchase, build, or substantially improve the borrower's principal residence. To qualify, the loan must be secured by the principal residence.

You, your spouse, a co-owner of the home, or anyone else for whom the home was their residence died, got divorced or legally separated (or were issued a separate decree to pay support to the other spouse), gave birth to two or more children from the same pregnancy, became eligible for unemployment compensation, or were ...

The six-month rule – this is when the ATO allows you to hold two PPOR if a new home is acquired before a purchaser disposes of the old one. Both properties will be treated as PPOR for up to six months in this case.

When selling a primary residence property, capital gains from the sale can be deducted from the seller's owed taxes if the seller has lived in the property themselves for at least 2 of the previous 5 years leading up to the sale. That is the 2-out-of-5-years rule, in short.

Driver's license; Voter registration; Tax documents showing the Residential Unit as the Permanent Resident's residence for the purposes of a home owner's tax exemption; A utility bill.

Bottom Line. The IRS prohibits married couples from claiming two primary residences for tax purposes. The designation of a primary residence, or “main home,” holds significant importance for homeowners due to the array of tax benefits tied to this status.

A primary residence (also known as a principal residence) is where an individual spends the majority of their time. Second homes are defined by how you use the home — you must occupy the property for a portion of the year, but it cannot be where you live day-to-day.

Can the IRS take your principal residence? ›

The answer to this question is yes. The IRS can seize some of your property, including your house if you owe back taxes and are not complying with any payment plan you may have entered. This is known as a tax levy or tax garnishment.

If you have lived in a home as your primary residence for two out of the five years preceding the home's sale, the IRS lets you exempt $250,000 in profit, or $500,000 if married and filing jointly, from capital gains taxes. The two years do not necessarily need to be consecutive.

Income excluded from the IRS's calculation of your income tax includes life insurance death benefit proceeds, child support, welfare, and municipal bond income. The exclusion rule is generally, if your "income" cannot be used as or to acquire food or shelter, it's not taxable.

The IRS expects taxpayers to keep the original documentation for capital assets, such as real estate and investments. It uses these documents, along with third-party records, bank statements and published market data, to verify the cost basis of assets.

In order to qualify for the principal residency exclusion, an owner must pass both ownership and usage tests. The two-out-of-five-year rule states that an owner must have owned the property that is being sold for at least two years (24 months) in the five years prior to the sale.

You can avoid capital gains tax when you sell your primary residence by buying another house and using the 121 home sale exclusion. In addition, the 1031 like-kind exchange allows investors to defer taxes when they reinvest the proceeds from the sale of an investment property into another investment property.

Most of the time, the basis is the cost of the property plus any amount paid for capital improvements and any casualty losses that may have been claimed for tax purposes. That said, cost basis is a complicated topic and we recommend speaking with a licensed CPA who can assess your specific situation.

Answer: Your second residence (such as a vacation home) is considered a capital asset. Use Schedule D (Form 1040), Capital Gains and Losses and Form 8949, Sales and Other Dispositions of Capital Assets to report sales, exchanges, and other dispositions of capital assets.