It’s crucial to understand how lenders establish risk management by establishing property designations with various risk factors. Less risk offers lower interest rates on the borrowed money. Lenders calculate primary residence property as safer investments. Primary residence mortgages can be easier to qualify for because the lender believes homeowners are more likely to stay on top of payments for their shelter. The primary residence designation must meet several characteristics according to IRS and mortgage lenders to take advantage of tax shelter on capital gains tax and mortgage interest, which allows more significant savings throughout the amortized repayment timeframe:
The IRS defines a primary home under these conditions:
- Occupancy must begin within 60 days of closing.
- Where you spend the most time
- Your legal address listed for tax returns, with the USPS, on your driver’s license, and your voter registration card
- The home is near employment, recreational clubs with an active membership, or near family members.
- If you refinance the mortgage for your primary home, you must be able to prove your residence through documentation (e.g., tax returns or government identification).
The IRS also allows you to exclude up to $500,000 in capital gains if married filing jointly or $250,000 if single. The capital gains tax rate is 0%, 15%, or 20%, depending on your income level.
- Consistent property ownership for at least 24 months out of the previous five years.
- Primary residence for at least 24 months out of the last five years
- No other claim of capital gains exclusion in the past two years