What Counts as a Principal Residence?

For principal residence gain exclusion purposes, the question isn’t “did the taxpayer own a house,” but “was this property, based on all the facts and circumstances, the taxpayer’s principal residence?” A principal residence is generally the taxpayer’s main home, and the term residence is broad enough to include a house, condominium, cooperative apartment, mobile home, house trailer, or even a houseboat, so long as the taxpayer is entitled to occupy it and uses it as a home.

When a taxpayer has multiple residences, perhaps a city condo and a lake house, the regulations tell us to look first at where the taxpayer spends the majority of their time during the year, but this isn’t the only factor. The regulations provide a nonexclusive list of additional indicators: the location of the taxpayer’s employment; where family members live; the address used on federal and state income tax returns; the address on a driver’s license, vehicle registration, and voter registration; the address where bills and correspondence are sent; where the taxpayer’s banks are located; and the location of religious and recreational organizations the taxpayer frequents. Clients chasing state tax benefits or lifestyle flexibility can unintentionally scatter these ties across more than one location; by the time of sale, their own paperwork may support the IRS’s argument that the property they want to treat as the principal residence was, in fact, the vacation home.

To dig deeper, visit the original article on the Thomson Reuters blog.