What Is a Principal Residence?

Principal Residences Explained in Less Than 4 Minutes

Definition
A principal residence is your main home, or where you live most of the time.
A couple prepares their taxes at home.
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A principal residence is your main home, or where you live most of the time. This definition is important for certain tax purposes.

While you might also own a secondary residence, such as a vacation home or cottage, the primary residence is where you spend the majority of your time. Understanding what a principal residence is and how it affects your taxes can help you file them correctly and optimize your deductions.

Definition and Examples of a Principal Residence

A principal residence is the place where you live most of the time, such as a house, condo, or even a houseboat. The identification of a principal residence is often important for tax purposes, such as to determine residency status for state taxes or to claim a homeowner’s deduction.

The exact definition of a principal residence can vary based on the agency making the determination. For example, the IRS states that a principal residence means “your main home.”

  • Alternate name: primary residence, domicile

Even if you own multiple homes or split your time equally between multiple locations, such as if you live with family for half the year and rent your own place elsewhere for the other half, you only have one primary residence. While the amount of time you spend there is generally the biggest factor in determining your principal residence, other factors include the address you use for official purposes, such as receiving mail and filling out tax returns.

How Does a Principal Residence Work?

The designation of a principal residence can come into play in several ways. One common way a principal residence can affect your taxes is related to homeownership. For example, if you sell your principal residence, you may be able to exclude up to $250,000 ($500,000 if married filing jointly) in proceeds from your federal income taxes.

Your principal residence could also make you eligible for a homeowner’s exemption on your property taxes. The rules vary by jurisdiction; for example, in California, homeowners are eligible to have $7,000 deducted from the assessed value of their primary residences. But if you own two homes in the state, you can’t take the exemption on both, even if you and your spouse technically own them separately. In this case, your principal residence is the one where you plan to live permanently.

Note

Some states also offer property tax exemptions for veterans, people with disabilities, and people over the age of 65. Again, these exemptions typically apply to taxes on your principal residence, not on any secondary homes.

Identifying your principal residence can be important for renters, too. For example, in Massachusetts, renters may be able to deduct 50% of the rent paid for their principal residence (up to $3,000) on their income tax return. But certain exclusions apply; for example, a college student who rents a dorm room in Massachusetts wouldn’t qualify.

Principal residences can also come into play when you’re determining your residency for state income tax purposes. For example, if you have a principal residence in New York state, you have to file taxes as a resident there—even if you don’t currently live there, for as long as you intend to return to that home. Someone out of the state on military assignment or who lives in a warmer climate for the winter would still be a New York resident if they have a principal residence there and plan to return to it.

What Does a Principal Residence Mean for Individuals?

Understanding what a principal residence is can help you file your taxes correctly and potentially save money. Based on your principal residence, you may be eligible for certain deductions, so it’s good to know what rules apply to your circumstances. Plus, you want to be sure you don’t make a filing mistake, like not filing as a resident even though you maintain a principal residence in a particular state.

Making a home your principal residence can also come into play when applying for a mortgage, as you may be eligible for a lower rate on a primary residence compared with a second home.

Key Takeaways

  • A principal residence is typically your main home, where you live most of the time. It’s the address you use to receive mail and file your tax return.
  • Your principal residence is important for tax purposes, such as to determine your state filing status.
  • Homeowners can benefit from exemptions on a portion of the proceeds of selling their primary residence. Some may also qualify for property tax exemptions, depending on their state.
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Sources
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  1. IRS. “Publication 523 (2021), Selling Your Home.” See “Does Your Home Sale Qualify for the Exclusion of Gain?” Accessed Feb. 1, 2022.

  2.  IRS. “Publication 523 (2021), Selling Your Home.” See “Introduction.” Accessed Feb. 1, 2022.

  3. California State Board of Equalization. “Homeowners’ Exemption.” Accessed Feb. 1, 2022.

  4. Mass.gov. “Deductions on Rent Paid in Massachusetts.” Accessed Feb. 1, 2022.

  5. New York State Department of Taxation and Finance. “Frequently Asked Questions About Filing Requirements, Residency, and Telecommuting for New York State Personal Income Tax.” See “How Do I Know if I Am a Resident of New York State for Income Tax Purposes?” Accessed Feb. 1, 2022.

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