Primary Residence: The Real Definition and Why it Matters

First, primary residence and principal residence mean the same thing. So when we talk about mortgages, primary residence and principal residence are interchangeable terms.

Primary Residence: The Real Definition and Why it Matters

What is a Primary Residence?

In short, a primary residence is the main location where a person lives. It could be a home, condo, apartment, or even a boat. The main defining criteria are simple: this property is where you live most of the time throughout the year.

When you buy or own a property, it doesn’t become a primary residence by default. Meaning, you could purchase a home, design the interior, move all your personal belongings and even stock the fridge. But if you don’t live there most of the time, it won’t qualify as your principal residence.

Primary Residence: How it Affects Your Mortgage

Every mortgage application needs to declare the property type: primary home, a second home, or investment property.

Generally speaking, mortgage rates are lower for a primary residence. Getting a low-interest rate on your mortgage can save you thousands of dollars over the life of your loan. In addition, there are several loan programs and discounts available for homebuyers who are buying or refinancing a principal residence.

The Benefits of Declaring Primary Residence When You Apply for a Mortgage

  • Lower interest rate
  • Mortgage interest is tax-deductible
  • Property taxes are tax-deductible
  • Better loan options
  • More flexibility on your mortgage terms
  • Better mortgage options for refinancing

On a side note, you may also qualify for a big tax break on capital gains when you sell a primary residence. Capital gains tax is due when you sell as an asset (like a home) for a profit. For 2021, the IRS allows taxpayers to bypass taxes on the first $500,000 in capital gains (married filing jointly) or $250,000 if filing single. Be sure to check with your tax accountant since there are exclusions and additional rules that homeowners must meet to take advantage of this tax break.

Primary Residence: The Criteria to Meet (and a few rules to follow)

Simply put, a primary residence is where you live most of the time. However, there are many situations where that isn’t clearly defined. For example, if you travel for work regularly or split your time working in two different locations, which one is your principal residence? Or let’s take a couple that spends half their time in a summer location and the other half in a winter location—which property will be their principal residence?

When you apply for a mortgage, you can define a property as your primary residence by applying the following criteria:

  •  Where are you registered to vote?
  •  Which address is on your federal and state tax returns?
  •  Which address is on your driver’s license?
  •  Is your address listed with the U.S. Postal Service?

In addition, the IRS defines a principal residence as one that is close to your work, close to your bank, where your family lives, or where you are a part of a club or organization. Click here for more info on the tax implications of a principal residence.

An experienced mortgage broker can help you work through different scenarios.  We have clients with every situation you can imagine, and we can help you decide the best path when it comes to your mortgage.

Final Takeaway

When you’re ready to buy a home and apply for a mortgage, it’s wise to know what type of property you want and whether or not it will be your primary residence. Homebuyers must meet specific criteria to claim a new property as their principal residence. But the benefits are worth it—qualifying for a lower interest rate, more loan options, and getting a better mortgage. Not to mention tax deductions and savings on capital gains if you decide to sell.

What’s Next

When you’re ready to buy a home, working with an experienced mortgage broker makes all the difference. Whether your home will be your primary residence, a second home, or an investment property, we can make sure you get the best rate possible with dedicated service and personal attention. So give us a call to get started. We’re here to help.

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