To the taxman, your house may not count as your home

By Benny L. Kass
Saturday, January 16, 2010

"Income tax returns are the most imaginative fiction being written today."

-- Herman Wouk

The concept of "principal residence" is critical in our tax laws. To qualify for the first-time-home-buyer tax credit, the house you buy must be your principal residence. If you want to claim the exclusion of up to $500,000 in capital gains ($250,000 if you are not married) when you sell your home, that property must be your principal residence.

When you file your annual income tax return, you can deduct the interest you pay on your mortgage (up to a certain limit), and you can deduct the real estate tax paid to your local government. The deductions are available for your principal residence and for one vacation home.

But what, exactly, counts as a principal residence? There is no statutory definition in the tax code. If you ask an Internal Revenue Service agent or your tax attorney for a definition, he or she will probably advise you that it depends on the facts and circumstances of each case. Even in IRS publications, there is no clear-cut definition.

If you have lived in the same house for many years and consider it your principal home, it will clearly be your "principal residence." The key components that will guide the courts and the IRS in making their decision are the following:

-- Where do you pay your state or local income tax?

-- Where do you vote?

-- What is the address on your driver's license?

-- Where do you get your mail?

-- Where are the banks you use and the recreational clubs and religious organizations to which you belong?

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