Foreclosure and the Definition of Primary Residence: Why It's Important
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For most people, there is no doubt about whether their home is their primary, or principal, residence. If you live in your house year-round and have done so for years, your house is clearly your primary residence. But for some people, the question of whether a property they own is or is not their primary residence is a difficult question to answer. Take, for example, someone who splits their time between a home in New York and another in Florida, or a person who rents out their home while they live temporarily overseas.
Whether your home is your primary residence or not is significant when you are facing foreclosure. Many of the federal foreclosure prevention programs and the federal law exempting borrowers from paying income tax on forgiven mortgage debt only apply to a borrower’s primary residence.
Primary Residence Defined
Even before the housing meltdown in the United States, the question of whether a home was a borrower’s primary residence was relevant for tax purposes. Homeowners receive a number of benefits under the U.S. tax code: the deduction from income of mortgage interest and property tax payments and the exclusion from capital gains of any increase in a home’s value when the home is sold. Yet the tax code fails to give a concrete definition of primary residence.
In one of its publications, the IRS defines principal residence as your “main home,” then goes on to define main home as follows: “Your main home is the home where you ordinarily live most of the time. You can have only one main home at one time.” Elsewhere, the IRS states that a main home can be a house, houseboat, mobile home, cooperative apartment, or condominium. Basically, as long as the home has a place for you to sleep, a bathroom, and a kitchen, it can be your primary residence.
The courts and the IRS have previously stated that whether a property is a borrower’s primary residence or not depends on the facts of each case. Facts that are relevant include where the borrower is a registered voter, the address on the borrower’s driver’s license, and where the borrower pays local or state income tax. And just because the borrower rents out the home does not necessarily mean the home is no longer the borrower’s primary residence.
Why Should You Care About Primary Residence?
If you're in foreclosure, whether your home is your primary residence or not is significant primarily because of the Making Home Affordable program and the 2007 Mortgage Debt Relief Act.
Primary Residence Under the Making Home Affordable Program
Many of the federal programs designed to help homeowners in foreclosure have a requirement that the property securing the homeowner’s mortgage be the homeowner’s primary residence. For example, the Home Affordable Refinance Program (HARP) and elements of the Home Affordable Modification Program (HAMP) and the Home Affordable Foreclosure Alternatives Program (HAFA) only apply if the home that is in danger of foreclosure is the borrower’s primary residence. (Fortunately, HAMP, arguably the most popular program under the Making Home Affordable umbrella, added a second level that allows modifications of mortgages secured by rental properties.)
This doesn’t mean you have no other option other than foreclosure if the home is not your primary residence but rather your options are limited primarily to the traditional foreclosure alternatives that are offered by your mortgage servicer. See our section on traditional foreclosure alternatives that may be available if you hope to keep your home or if you have decided to let your home go.
Primary Residence Under the 2007 Mortgage Debt Relief Act
If you lose your home in a foreclosure sale or short sale and your lender forgives you for the deficiency (the difference between the outstanding mortgage debt and the sale price), the cancelled debt must be included in your taxable income unless it is “qualified principal residence indebtedness.” The IRS defines qualified principal residence indebtedness as any mortgage you took out to buy, build, or substantially improve your main home, or primary residence. Other restrictions apply to this exclusion from taxable income under the 2007 Mortgage Debt Relief Act; for further details, see our article on Income Tax Liability for Deficiencies.
If you’re in foreclosure and are not quite sure whether your home is your primary residence and whether you qualify for one of the Making Home Affordable programs or tax relief under the Mortgage Debt Relief Act, you should still apply and make the argument that your home is indeed your primary residence. Your application may be rejected and your definition of primary residence discounted, but you can’t know for sure unless you try.
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