How Does the IRS Check Primary Residence Status?

Got Multiple Properties?

When you buy a home, it can be a primary residence, a second home, or investment real estate that you plan to rent out to others. Most individual home buyers are purchasing homes they want to live in — primary residences.

But what if you have more than one property? Getting your primary residence status right is critical. Lenders care about this information, because homes are collateral. Lenders know buyers tend to keep personal homes well maintained. And if you have multiple properties, the IRS wants to be sure you claim your primary residence correctly.

Occupancy fraud occurs when homeowners knowingly misrepresent their intended use of a residence. Since Covid 19 struck, it’s on the rise. The government is looking for signs of fraud. Here’s what you need to know. 

There’s No Set Definition for “Primary Residence.” It’s Just Where You Live, Most of the Time.

Your primary residence is where you can prove you live most of the year. A house, co-op, apartment, houseboat, mobile home or trailer can be considered a primary residence as long as the place is a real fixed address where an individual or household resides most days of the year, and as long as there is a kitchen, bedroom and toilet. A primary residence:

  • Typically qualifies for the lowest mortgage rates.
  • Allows a home buyer to deduct the mortgage interest paid all year.
  • Allows a home buyer who later sells the home to exclude the profits from taxation.

What if you live in multiple homes during the year? Then your primary residence is wherever:

  • You live most of the time.
  • You receive most of your mail, including your driving and voting documents, and tax returns.

And if you’re married, the home your spouse claims as the primary residence has to be the same one you call a primary residence.

Buying a Primary Residence? Your Mortgage Lender Wants to Know.  

A mortgage applicant tells the mortgage company what kind of residence is to be financed. Will it be the borrower’s primary residence? A vacation home? A place to rent out for income? Based on the applicant’s intent for using the home, the lender can offer a specific mortgage rate.

Because a lower interest rate means a lot of interest savings during the term of a mortgage loan, a primary residence classification is valuable to the homeowner.

When tax time rolls around, the classification matters to the IRS, too. The interest payments a borrower makes are deductible, if the taxpayer claims itemized deductions on Form 1040, Schedule A. Those who bought after 2006 may also claim mortgage insurance payment deductions.

Pro tip: Mortgage interest deductions and property tax deductions are available for a primary home, and for a second home that you sometimes live in. Speak with your tax adviser for case-specific guidance.

Selling a Primary Residence? There’s a Tax Advantage for That.

A seller can exclude the profits on a home sale from taxation if the home is a primary residence. What does this mean? If your home goes up in value and you sell it at a profit, those capital gains escape taxes. Taxpayers (as of now) can make a profit up to $500,000 (married filing jointly) or $250,000 (for a single taxpayer), according to the IRS.

To get this tax break, the owner must have:

  • Lived in the home as a primary residence.
  • Owned it and lived there two out of the five years leading up to the day you sell (with some exceptions; see IRS Publication 523). Taking normal vacations doesn’t count against that time. It’s OK to rent a permanent residence, too. But if you are away for an extended period, you could fall afoul of the two-year use rule.
  • Claimed no other capital gains exclusion over the last two years.

Capital gains get a tax exclusion only when the home being sold is a principal residence.

When you move, keep in mind that you, the owner, have the burden of proving the home you sold really was your principal residence. Just hang on to your billing statements and proof of ID that state your former address: voter’s card, driver’s license, and utility bills that indicate when you lived in the home.

One more thing. You cannot deduct any losses from the sale of your home — just the profits.

Common Question: What If You Lived in the Home Less Than Two of the Last Five Years When You Sell?

Then you could still qualify for a reduced maximum exclusion that’s based on the time you did own the home and live in it.  

Ask your tax pro about taking the reduced maximum exclusion if the key driver for your move was:

  • A change in your job location.
  • A health problem.
  • Other circumstances that you could not have predicted.

If, for example, you are pressed to sell before the two-year period due to being moved by your company, or for other circumstances beyond your control, you might be able to keep a specific portion of your sale profits nontaxable.

When Is a Property Not a Primary Residence? When It’s a Rental Property or Second Home.

Do you plan to hold title to more than one residential property? If one of them is a vacation home or an investment property, or if you plan to turn it into a rental within six months of your purchase, do not consider it a primary residence. 

Of course, sometimes people buy property meaning to use it as a primary residence, but the situation changes. Buyers who decide they want to turn their primary home into an investment property should discuss the effects of this change with the mortgage servicing company and with their tax adviser.

And what if it’s a case of using two homes, each one for about six months of the year? This will come down to recordkeeping. Have your receipts, literally and figuratively, showing you’re claiming one as primary because it’s where you engage in most of your activities and spend most of your time.

Remember the key rule. When you pay your taxes, you list one address only as your primary residence, and it has to be where you live most of the time.

At the End of the Day, Will the IRS Question a Primary Residence?

The IRS takes this issue seriously. Because some jurisdictions have lower taxes than others, and because of the above breaks people get on a primary home, the IRS is interested in where a taxpayer claims to live. Understand how the IRS looks at this question to avoid falling afoul of the law.

The IRS will be looking at whether the home you claim as a permanent residence is where you submit your state and local tax return, where you’re voting, banking, paying utility bills, and receiving most of your mail, and where your government IDs say you live.

Other factors that back up your claim of living in a certain place? Consider:

  • Where you mainly work.
  • Where you attend business, social, and religious meetings.
  • Where your kids attend school, if applicable.
  • How long you have been renting the property out, if applicable.

Keep organized document files! Not all the documents will show your activities happening in the same place, of course. But the government will be looking at details to paint an overall picture.

Supporting References

U.S. Internal Revenue Service (IRS): Sale of Residence – Real Estate Tax Tips (updated Sep. 20, 2022).

U.S. Internal Revenue Service (IRS): About Publication 523 – Selling Your Home (updated Oct. 3, 2022).

U.S. Internal Revenue Service (IRS): About Form 8949 – Sale and Other Dispositions of Capital Assets (updated Sep. 21, 2022).

26 CFR § 1.121-3: Reduced Maximum Exclusion for Taxpayers Failing to Meet Certain Requirements.

Talia Chopra for Schneider Estates: Primary Residence, Second Home or Investment Property: How to Know the Difference (Oct. 25, 2019).

Victoria Araj for Rocket Mortgage®: Primary Residence – What Is It And Why Is It Important? (Aug. 22, 2022).

CoreLogic®: Mortgage Fraud Trends Report (Apr. 19, 2021).

Mark Ellwood for Occupancy and Mortgage Fraud Is on the Rise During COVID (Jan. 19, 2022). 

And as linked.

Photo credits: Yan Krukov and Anfisa Eremina, via Pexels.