The IRS has the unique skill of making things much more complicated than they have to be. Home sellers may come across the term principal residence and scratch their heads. That’s because no one calls their home a principal residence, even though that’s exactly what it is.
Your home is your principal residence, it’s also your primary residence. Homeowners will be especially interested in what exactly qualifies as their principal residence when they are preparing to sell their home.
The last word that anyone wants to hear after selling their home is — taxes. There are ways to avoid capital gains taxes on the sale of your principal residence and an experienced real estate agent can help. A Clever Partner Agent will have the know-how to answer any questions that you have regarding your principal residence.
Top FAQs About Principal Residences
What qualifies as a principal residence?
A principal or primary residence is the property that you live in for the majority of the year regardless of whether you own or rent it. Other factors that influence whether your home qualifies as your principal residence is its proximity to your place of work, your main bank, any organizations that you are a member of, and one or more family members.
Your principal residence should be the address listed on your driver’s license, voter registration, your tax returns, and your USPS account. If you have recently moved, you will need to update your address on these documents. Single-family homes, houseboats, co-op apartments, condos, and mobile homes may qualify as principal residences.
How do you prove your primary residence?
You can prove your primary residence by showing documents that show the address, these documents include your license, passport, voter registration card, tax returns, and utility bills.
Can I have two principal residences?
You may only have one principal residence at a given time, according to the IRS. If you happen to live in multiple residences you will need to perform the “facts and circumstances” test to figure out which qualifies as your primary residence.
Can I rent out my principal residence?
You may rent out your principal residence, however, you may face limitations on what you can deduct on your taxes. Common deductions include real estate taxes, insurance, depreciation, mortgage interest, maintenance, utilities, and more.
How do you avoid capital gains tax on the sale of your primary residence?
Both married and single individuals may be eligible for a capital gains tax exclusion of the first $500,000 of your gain for married or the first $250,000 for single individuals. You must establish eligibility by meeting the following requirements:
- The property must your primary residence.
- Your home must not have been obtained via a 1031 exchange in the past five years.
- You must not be subject to expatriate tax.
- Your ownership of the property must pass the look-back requirement.
Do you have to report the sale of your principal residence?
You must report the sale of your home if you have a loss and have a Form 1099-S, if you have a gain and don’t qualify for full exclusion, or you have a gain and choose not to exclude it. If these three events do not apply to you, then the IRS does not require that you report the sale of your principal residence.
How Clever Can Help with Your Home Sale
You may not need to pay thousands of dollars in capital gains tax on the sale of your primary residence. A Clever Partner Agent can help you to determine your eligibility for a capital gains exclusion. They have the knowledge and the experience to help ensure that you can keep more of the profit on your home sale.