UK Accounting Glossary
Principal residence refers to the main home where a person lives. In addition to a single-family home, a principal residence may be an apartment, houseboat or trailer. For example, Mr Smith spends nine months out of the year living in a rented apartment and spends three months in a single-family home. In this case, Mr Smith’s principal residence is the apartment rental. The IRS has several tax provisions that are applicable to a taxpayer’s principal residence. A few of these include the deductibility of mortgage interest (on a principal residence as well as a second home), exclusion of capital gains taxes on the sale of your principal residence (under certain conditions), and the deductibility of real estate taxes paid on your principal residence.
In order to meet the criteria to qualify as a principal residence for purposes of the capital gains tax exclusion, a taxpayer must meet the ownership and use tests and also not have excluded gains from the sale of another home in the two year period prior to the sale of the current principal residence. The ownership test requires that the taxpayer has owned the principal residence for at least two years whereas the use test requires that during at least two of the prior five years the taxpayer has occupied the principal residence.
The following IRS publications provide further details on taxes as relates to a taxpayer’s principal residence:
IRS Publication 523 – Selling your home
IRS Publication 530 – Tax Information for Homeowners
IRS Publication 936 – Home Mortgage Interest Deduction
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This glossary post was last updated: 6th February 2020.