Primary or principal residence: The dwelling that serves as the main living space of a homeowner.
Primary or principal residence: The residence that is considered the legal residence for the purpose of income tax and/or acquiring a mortgage.
Defining a Homeowner’s Primary Residence
According to the Internal Revenue Service, “If a taxpayer alternates between two properties, using each as a residence for successive periods of time, the property that the taxpayer uses a majority of the time during the year ordinarily will be considered the taxpayer’s principal residence.
“In addition to the taxpayer’s use of the property, relevant factors in determining a taxpayer’s principal residence, include, but are not limited to:
(i) The taxpayer’s place of employment;
(ii) The principal place of abode of the taxpayer’s family members;
(iii) The address listed on the taxpayer’s federal and state tax returns, driver’s license, automobile registration, and voter registration card;
(iv) The taxpayer’s mailing address for bills and correspondence;
(v) The location of the taxpayer’s banks; and
(vi) The location of religious organizations and recreational clubs with which the taxpayer is affiliated.
In 2006, when the real estate market bubble burst, an estimated 97% of Americans owned a principal residence that was worth considerably less than what they still owed on the mortgage. “As a result, these taxpayers sought out some type of debt modification with their lender, where the lender would forgive a portion of the principal. And if they weren’t so lucky, they were left to sell the home in a foreclosure or a short sale, with the lender again agreeing to forgive any remaining deficiency after the sale,” according to Tony Nitti, a Tax Partner in Withum, Smith and Brown’s National Tax Service Group in Aspen, Colorado.
For homeowners facing foreclosure, recognizing their home as their primary residence is important due to the 2007 Mortgage Debt Relief Act, which was extended until 2017. Under the act, if a homeowner lost their home in a foreclosure sale or short sale and the lender forgives the deficiency – the difference between the outstanding mortgage balance and the foreclosure sale price – the cancelled debt does not need to be added to the homeowner’s taxable income as long as it is “qualified principal residence indebtedness.” The IRS defines qualified principal residence indebtedness as any mortgage taken out to buy, build, or substantially improve a primary residence.
On May 9, 2017, in a letter to the U.S. Senate, National Association of Realtors President William E. Brown wrote:
“While in many areas, the housing market has certainly experienced gains along with the broader economy, recent estimates by the real estate data analytics firm CoreLogic, show that about 3.2 million (over 6 percent) homeowners with mortgages in the U.S. are still “under water.” Further, the Mortgage Bankers Association estimates there are still nearly 600,000 homes in the process of foreclosure across the nation. In short, it is clear that this legislation is needed now as much as ever.”