According to the IRS, your main residence (or “major residence”) is the home where you spend most of your time. It must be a home located near your employment location and you will use as your legal address.
When you buy a home, your primary residence qualifies for a specific government-supported loan. It also has a different tax impact than a second home or villa. Additionally, your mortgage rate will be lower on major homes as lenders think it is less risky.
Your main residence does not have to be a detached house. It could be an apartment, condo, or townhome.
Key Residential Rules by the IRS
When evaluating you for a loan, your mortgage lender needs to know if it is a primary or secondary residence. This will affect the terms of your loan. To ensure that the home is used as a primary residence, lenders use criteria set by the Internal Revenue Service (IRS). According to the IRS, the main residence rules are:
Home is where you spend most of your time. Addresses can be found on both your driver’s license, voter registration card, and federal and state tax returns. It will be used as a mailing address. The house is close to your work, the bank, at least one home of your friends or family, a church or gym home.
Typically, these standards must be true for at least a year after closing your home. This is to ensure that the house is not used as investment property.
How does a primary home affect mortgage terms?
Mortgage rates for major housing will be lower than in the second home or investment property. Of all the real estate properties you can purchase, your main home is considered the lowest lending risk.
Because you live there, your lender knows that if you run into financial problems, it will always be the first loan you’ll try to pay. As such, lenders are typically charged about 0.25%-0.75% more at interest rates on second homes and investment property.
How does primary housing affect income tax?
Your primary residence also comes with certain tax benefits, such as mortgage interest tax credits. If you purchase a home after December 16, 2017, you can deduct interest on your first $750,000 mortgage debt. If you are married separately, you can deduct interest on your first $375,000 mortgage debt.
How does primary housing affect capital gains tax?
When selling a house that is value-increasing, you need to pay capital gains tax. However, if you sell a major residence, you are eligible for capital gain exclusion.
With capital gains exclusion, homeowners can exclude up to $250,000 for a single filer and up to $500,000 for co-married people. Avoiding capital gains taxes can save you a significant amount of money when selling your home.
1031 Exchange
If you are selling an investment property you plan to buy another, you can postpone the capital gains tax by replacing 1031. With the exchange of 1031, there is little profit as you are not trading one investment property with another. However, if you run 1031 Exchange and later use the property as a primary residence, you will not qualify for a capital gain exclusion at the time of sale.
Two times in the five-year rule
The IRS uses the “two rules for five years” to determine whether they qualify for a capital gain exemption. The rule states that you must have owned your home for at least two of the past five years, and it has been your residence all the time. You will also not be able to request any other capital gain exclusions over the past two years.
Main Residences: FAQ
If you have additional questions about owning a major residence, the answers to the following questions may be helpful:
Are the main residences the same as the main residences?
Yes, the main residence and the main residence are the same. Both terms refer to the home you live in for the majority of the year.
Can the second home be considered a major residence?
No, the second home is not considered a major residence as it doesn’t spend most of its time there. Usually, the second home is purchased for living only in part of this year. However, you can move the second home to a major residence. You will need to update the address on your driver’s license, voter registration card and tax return.
Can a couple have two main residences?
No, a couple can have only one major residence. Whether a couple has two homes, or even splitting the time between those homes, they can only claim one major residence. To determine which is the main home, couples need to do a “fact and situation” test.
What are the benefits of a major housing?
Taking mortgages in major residences will qualify for low interest rates that will save you a lot of money during the life of the loan. And your main residence has certain tax benefits, such as mortgage interest tax credits and capital gain exclusions.
Can I rent a main residence?
Yes, you can rent your home, but you may need to inform your lender first. Because major settlements qualify for better terms and lower interest rates, some lenders have rules as to whether you can borrow it. Therefore, you will want to check your loan agreement to make sure you have not accidentally broken the law.
How do I check my main residence?
There are several different ways to identify the main residence. First, the main residence is the home where you spend most of your time and you can demonstrate it on a utility bill. You can also use your driver’s license, voter registration card, and addresses on your federal and state tax returns to check your primary residence.
Conclusion
Before applying for a mortgage, it is important to understand how the home you are purchasing is categorized. Key housing has better conditions, lower interest rates and certain tax benefits.
