What Is a Primary Residence? And How Does It Affect Your Mortgage?

What is a primary residence? Plainly speaking, it’s the house or apartment that you call home. But your primary residence—sometimes referred to as your principal residence—also has important mortgage and tax implications, says Steve Albert, director of tax services at CPA wealth management firm Glass Jacobson.

Here are four crucial things you need to know about your primary residence.

What is a primary residence?

In a nutshell, a primary residence is the main home that a person inhabits. This can be a house, apartment, trailer, or houseboat where an individual, couple, or family live all or most of the year. It’s also the address that appears on an individual’s driver’s license, automobile registration, and voter registration card. And, in general, someone’s primary residence is the home that’s closest to a person’s employer.

You can have only one primary residence at a time.

Because your primary residence affects how much you’ll have to pay come tax time, here’s how the IRS defines a principal residence: “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.”

How does my primary residence affect my annual taxes?

Some parts of your primary residence are tax-deductible, such as your mortgage interest, Albert says. Under the new tax plan, taxpayers can deduct mortgage interest on loans up to $750,0000 combined for both primary and secondary (vacation) homes. (The previous limit was $1 million.)

If you obtained a mortgage after 2006, you can also claim your mortgage insurance payments as part of the interest and deduct them. But to take advantage of these deductions, you’ll have to itemize your tax returns (on Form 1040) rather than taking the standard deduction—currently $6,300 for singles and $12,600 for married couples. Generally, the amount of money you can deduct in mortgage interest will exceed the amount you would receive by claiming the standard deduction.

How does my primary residence affect my capital gains taxes when I sell my home?

If you sell a home that you’ve held onto for more than a year before the sale, then you are taxed at the long-term capital gains rate. However, the rate varies based on your income tax bracket, says Albert. (The more money you make, the higher your tax rate will be.)

Moreover, you may qualify for a capital gains tax cut through the Primary Residence Exclusion. According to the IRS, when you sell your primary home you can exclude $250,000 of your profit from the sale of your home if you are single, or $500,000 if you’re filing taxes jointly as a married couple.

You’re eligible for the exclusion if you have owned and used your home as your main home for at least two consecutive years out of the five years prior to its date of sale.

How does my primary residence affect my mortgage?

Generally, home buyers can qualify for better mortgage rates when borrowing money to buy their primary residence, since mortgage lenders are assuming less risk than when they finance a second mortgage.

Qualifying for a home loan is also easier when you’re buying your primary home because mortgage lenders require lower down payments than they do on second homes or investment properties. Also, a number of first-time home buyer programs are available only to people who are buying their primary home. For instance, the Federal Housing Administration and the Department of Veterans Affairs issue FHA and VA loans only for primary home purchases, or “owner-occupied homes.”

Because of these mortgage benefits, you cannot declare a home as your primary residence if you plan to rent it out. Doing so would constitute as mortgage fraud, and if it’s detected any time during the mortgage process, your loan will be declined and you will be out any funds you’ve already paid, such as the appraisal fee or your earnest money deposit, warns Casey Fleming, author and mortgage adviser at C2 Financial Corp.

If you’re caught lying about your primary home later, your lender is likely to “call the loan,” meaning the entire amount would be immediately due, forcing you to try to refinance or sell the home.

Source: Realtor.com