Getting married and having multiple homes are blessings to enjoy – unfortunately, a tax exemption for two primary residences isn’t among the benefits of such a situation. While it would be wonderful if two people filing taxes meant twice the benefits and exemptions, U.S. tax laws require married couples filing jointly to claim just one primary residence every year. Understanding what qualifies as a primary residence is paramount, as it impacts tax liabilities and unlocks a range of benefits, from exclusions on capital gains taxes to various tax credits and deductions. Here’s how to tell which home is your primary residence and the exceptions lenders make for two primary residences.
A financial advisor can help you optimize your financial plan to lower your tax liability.
Can You Have Two Primary Residences If Married Filing Jointly?
The U.S. tax code provides tax advantages for married couples who file jointly and own a home. While duplicating these tax benefits with another residence would help your bottom line when you file taxes, it’s not possible to claim two primary residences because of tax regulations from the IRS.
Even if you have two homes you spend equal amounts of time in, you’ll choose one as your primary residence for tax purposes. The IRS calls this house the “main home.” As a result, every couple must designate the main home when they file. This requirement means you’ll receive specific tax benefits for one property every year, such as excluding of capital gains taxes from selling your home.
Outside of your tax circumstances, having two primary residences is possible on the lender side. For example, a married couple could acquire two primary residences if each spouse buys a primary residence and keeps their mortgages separate. This would mean each spouse having sufficient income on their own to buy a home.
Additionally, conventional loans can create a second primary residence in some situations. For example, buying a home for an adult child or disabled parent means that home is a primary residence, even if you have a primary residence already. Likewise, co-signing on someone else’s mortgage for their primary residence gives you partial ownership. However, these situations don’t mean you get to tell the IRS you have multiple primary residences. When you file with your spouse, you’ll use the IRS’s definition of primary residence to designate one home with this status.
What Qualifies as a Primary Residence?
The Internal Revenue Service (IRS) provides guidelines to determine what qualifies as a primary residence, also called the “main home.” The primary residence is generally where an individual or married couple lives most of the time.
If you live in and own one home, that’s automatically your primary residence. On the other hand, owning multiple homes you live in can complicate the situation. Usually, the home you spend more than half the year in is the primary residence. However, if you live in one home for six months and a second home for the other six months of the year, it’s best to select your primary residence to maximize your tax advantages. This choice has tax implications that are crucial to understand.
Why Does a Primary Residence Matter?
The distinction of a primary residence, or “main home,” matters for homeowners primarily because specific tax incentives and benefits are tied to this designation. Here are several reasons why it’s significant:
Tax exclusion on home sale profits: One of the key benefits is the ability to exclude $250,000 of profit from the sale of a primary residence from capital gains taxes. Joint filers (such as married couples) can exclude up to twice as much capital gain as a single filer. This way, the first $500,000 of gains a couple makes from selling their primary residence isn’t taxed. This exclusion can result in significant tax savings.
Lower mortgage rates: Selling your primary residence and buying another one usually involves getting a mortgage. Lenders usually offer lower interest rates for primary home purchases because homeowners prioritize paying for their main home over secondary properties.
1031 exchange rules: The 1031 Exchange Law allows you to sell an investment property and defer capital gains taxes by purchasing another investment property of similar value. This rule doesn’t apply to primary residences and can introduce challenges if you want to convert your investment property to your primary residence. For example, a primary residence that used to be a 1031 exchange doesn’t qualify for capital gains exclusions until you’ve lived in it for five years.
Proving a Principal Residence for Tax Purposes
Typically, proving your main home depends on where you spend your time, where you vote, and where you receive mail. For example, the primary residence you list on your tax forms should match your driver’s license and voter registration card. Similarly, bank statements, insurance policies, and mortgage documents can show your principal residence. If you recently moved, utility bills are helpful to prove where you live.
Additionally, a mobile home, apartment, or boat can be your primary residence if it has a sleeping area, a kitchen, and a bathroom. If you rent and live in an apartment, that property is your main home even if you own another house.
Remember, traveling abroad for parts of the year or being away because of an illness doesn’t disqualify you from having a primary residence. Likewise, if you’re an active military member, prolonged absences from your home won’t affect your primary residence’s status.
Tax Exemption for a Principal Residence
The tax exemption for selling your principal residence allows you to exclude at least a portion of capital gains from your taxes. However, couples must meet a set of criteria to qualify for the exemption: First, you must have lived in the property for at least two out of the last five years before you sell it. In addition, you can only claim the capital gains exemption once every two years, so a recent sale will make you ineligible.
It’s critical to remember that the exemption doesn’t shield you from losses. As a result, selling your primary residence for a loss won’t improve your tax situation, regardless of your filing status or housing situation.
Tax Advantages for Selling a Primary Residence
When you sell a home for more money than you paid for it, you could be on the hook capital gains tax. However, married couples can get a tax exemption for the sell of a principal residence up to $500,000 of those capital gains.
So if you and your spouse sell a home and make $300,000 from the sale, you would owe no capital gains taxes with this exemption. And, if you make $750,000, your first $500,000 of gains are exempt, meaning you would pay taxes on $250,000.
This rule can help keep your taxes affordable when you sell your home and put more money toward your next home purchase.
The IRS prohibits married couples from claiming two primary residences for tax purposes. The designation of a primary residence, or “main home,” holds significant importance for homeowners due to the array of tax benefits tied to this status. Therefore, understanding the implications of a primary residence designation is vital for navigating the complexities of tax advantages and ensuring a favorable financial outcome when selling a home.
Tips for Primary Residences When Filing Jointly as a Married Couple
Selling your home incurs capital gains taxes if you surpass the exclusion threshold or don’t qualify for an exemption. Luckily, a financial advisor can help optimize your financial plan to lower your tax liability. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Selling real estate might result in taxes if it’s not your primary residence – and that’s okay. You can navigate the capital gains situation on the sale of your second home or other piece of property, maximizing your profits.
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