The IRS has just nailed down its definitions for the most basic form of real estate--your "principal" home. In regulations issued Christmas Eve, the agency made clear that for tax purposes, your principal home can take a variety of shapes.
It can be a conventional home or condo. It can also be a boat, provided the craft contains sleeping, cooking and sanitary facilities such as a bathroom. It can be a mobile home or what the IRS calls a "house trailer." And it can be tenant-stockholder cooperative housing unit.
But what if you own more than one piece of residential property that potentially qualifies? What if you split your time between a home up north and a condo down south? Or a place at the beach that you bought as a vacation home but are gradually spending more time in as you get close to retirement age?
Now the IRS has issued its long-awaited official answers. In general, the tax agency says, your principal residence is the place you own and use as a residence for "a majority of the time during the year."
Okay, that sounds straightforward. But the IRS notes that the true test for many property owners will depend upon "all the facts and circumstances" of their situation. Among the key facts and circumstances the agency will look to:
Where is your place of employment in relation to the property you're claiming as your principal residence?
Where do your family members reside?
What address do you have listed on your "federal and state tax returns, driver's license, automobile registration and voter registration card?"
What mailing address do you use predominantly for "bills and correspondence?"
Where are your banks located?
Where are your "religious organizations and recreational clubs" located?
Here's another intriguing element to the principal residence puzzle: You can switch the designation from house to house each year to suit your own personal tax strategies. Say you own a house in Illinois and a condominium in Naples, Florida. The condo has appreciated substantially in recent years and you'd like to pocket as much as possible of that gain tax-free through a sale.
Here's how: You can choose to make your Florida vacation condo your principal residence for 2003 and 2004 by living in it more than six months each year. That should qualify the condo for the maximum capital gains exclusion of either $250,000 (single filers) or $500,000 (joint filers) if you want to sell it the following year.
Then you can switch your prinicpal residence back to your Illinois property again. Assuming you live in it and use it for a majority of the time during the subsequent two years following the sale of the condo, it too should qualify for the maximum capital gains exclusion.
The point here is that your "principal residence" need not be a static asset. It can be a highly flexible tax-planning tool. Better yet, under the guidelines just issued by the IRS, it can even be a sailboat tied up at a marina in Ft. Lauderdale or San Diego.
Published: January 6, 2003
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 Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation.He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate. |
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