Getting married and having multiple homes are blessings – unfortunately, a tax exemption for two primary residences is not one of the benefits of such a situation. While it would be wonderful if two people filing their taxes meant twice as many benefits and exemptions, U.S. tax laws require married couples filing jointly to claim only one main residence per year. Understanding what constitutes a primary residence is essential, as it impacts tax obligations and unlocks a range of benefits, from exclusions to capital gains taxes to various tax credits and deductions. Here’s how to know 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 reduce your tax liability.
Can you have two primary residences if you are married and filing jointly?
The U.S. tax code provides tax benefits to married couples who file jointly and own a house. Although duplicating these tax benefits with another residence would improve your bottom line when you file your taxes, it is not possible to claim two primary residences due to IRS tax regulations.
Even if you have two homes that you spend the same amount of time in, you will choose one as your primary residence for tax purposes. The IRS calls this home the “primary residence.” Therefore, each couple must designate the main residence when filing. This requirement means you will receive specific tax benefits for a property each year, such as excluding capital gains taxes from sell your house.
Apart from your tax situation, having two main residences is possible on the lender’s side. For example, a married couple could purchase two primary residences if each spouse purchases a primary residence and maintains their separate mortgages. This would mean that each spouse would have sufficient income to purchase a home.
In addition, conventional loans can create a second primary residence in certain situations. For example, purchasing a home for an adult child or disabled parent means the home is a primary residence, even if you already have one. Likewise, co-signature on someone else’s mortgage for their primary residence gives you partial ownership. However, these situations do not mean you have to tell the IRS that you have multiple primary residences. When you file your return with your spouse, you will use the IRS definition of principal residence to designate a home with this status.
What constitutes a primary residence?
The Internal Revenue Service (IRS) provides guidelines for determining what is considered a primary residence, also called a “primary residence.” The primary residence is generally where an individual or married couple lives most of the time.
If you live and own a house, it automatically constitutes your principal residence. On the other hand, owning multiple homes that you live in can complicate the situation. Usually, the home in which you spend more than half the year is your primary residence. However, if you live in a residence for six months and in a secondary residence the other six months of the year, it is best to select your primary residence to maximize your tax benefits. This choice has tax implications that are crucial to understand.
Why is a primary residence important?
The distinction of a principal residence, or “primary residence,” is important to homeowners primarily because specific tax incentives and benefits are attached to this designation. Here are several reasons why this is important:
Tax exemption on profits from the sale of housing: One of the main benefits is the ability to exclude $250,000 of profits from the sale of a primary residence from capital gains tax. Joint filers (such as married couples) can exclude up to twice as much capital gains as a single filer. This way, the first $500,000 of gains that a couple makes from selling their primary residence are not taxed. This exclusion can result in significant tax savings.
Lower mortgage rates: Selling your primary residence and buying another generally involves obtaining a mortgage. Lenders typically offer lower interest rates for primary home purchases because homeowners prioritize paying off their primary home over secondary properties.
1031 trading rules: Exchange Act 1031 allows you to sell an investment property and defer capital gains tax by purchasing another investment property of similar value. This rule does not apply to primary residences and may present challenges if you wish to convert your investment property at your main residence. For example, a primary residence that was formerly a 1031 exchange is not eligible for capital gains exclusions until you have lived there for five years.
Proving a primary residence for tax purposes
Generally, proving your primary residence 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 must match your driver’s license and voter registration card. Likewise, bank statements, insurance policies and mortgage documents may show your primary residence. If you’ve recently moved, utility bills are useful to prove where you live.
In addition, a mobile home, an apartment or a boat can be your main residence if it has a sleeping area, a kitchen and a bathroom. If you rent and live in an apartment, this property constitutes your main residence even if you own another house.
Remember that traveling abroad for part of the year or being absent due to illness does not disqualify you from having a primary residence. Likewise, if you are a active military Member, prolonged absences from your home will not affect the status of your primary residence.
Tax exemption for a main residence
Tax exemption for the sale of your main residence allows you to exclude at least part 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 of the last five years before selling it. Additionally, you can only claim the capital gains exemption once every two years, so a recent sale will make you ineligible.
It is essential to remember that the exemption does not protect you from losses. Therefore, selling your main residence at a loss will not improve your tax situation, regardless of your declaration status or your housing situation.
Tax advantages for the sale of a principal residence
When you sell a home for more money than you paid for it, you may be subject to capital gains tax. However, married couples can benefit from a tax exemption for the sale of a principal residence up to $500,000 of these capital gains.
So if you and your spouse sell a home and make $300,000 from the sale, you won’t owe any capital gains tax thanks to this exemption. And if you earn $750,000, your first $500,000 of earnings are exempt, meaning you’ll pay taxes on $250,000.
This rule can help you 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 principal residence, or “primary residence,” designation is of considerable importance to homeowners because of all of the tax benefits associated with this status. Therefore, understanding the implications of a primary residence designation is essential to understanding the complexities of tax benefits 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 exceed the exclusion threshold or don’t qualify for an exemption. Fortunately, a Financial Advisor can help you optimize your financial plan to reduce your tax liability. The free SmartAsset tool connects you with up to three licensed financial advisors who serve your area, and you can have a free introductory call with your advisor to decide which one seems best for you. If you are ready to find an advisor who can help you achieve your financial goals, start now.
Selling real estate may 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 any other property, thus maximizing your profits.
Photo credit: ©iStock/tommaso79, ©iStock/staticnak1983, ©iStock/filmstudio
The post office Can you have two primary residences if you are married and filing jointly? appeared first on SmartReads by SmartAsset.