There can only be one Principal Residence. What sets apart Principal Residence from other Domiciles and why is it interesting for tax exemption purposes?
If you have more than one residence and plan to sell one of them, it is advisable to check first which residence can fall under the principal residence exemption.
In general, profits from the sale of private properties are subject to income tax liability (i.e. Capital Gains Tax on Sale of Home). However, in special cases, the sale of these properties can be exempted from tax if certain requirements are fulfilled.
Exemptions from the Capital Gains Tax on Home Sales are the following:
- The sale of owner-occupied homes or apartments that serves as a principal residence (i.e. Principal Residence Exemption);
- The sale of a self-constructed building (i.e. Manufacture Exemption);
- The sale of a property due to a government official transaction; or
- The sale of properties due to certain exchange transactions (in the course of a merger or land consolidation procedure as well as in the course of a building land reallocation procedure)
For the sale of the principal residence by the seller, there exist certain exemption provisions. Tax exemption refers only to the sale of owner-occupied homes or apartments inclusive of land when the property either:
- serves as a principal residence for at least 2 continuous years from the purchase/construction/completion of the house up to the sale of the property and the seller gives it up as his principal residence (2 Year Period), or
- within the last 10 years serves as a principal residence for at least 5 continuous years before the sale and the seller gives it up as his principal residence (5 Year Period).
Primary Residence Definition:
According to the Federal Finance Court ruling, a primary residence is a residence where the taxpayer has close personal and economic ties if more than one residence exists during the qualifying period.
The determination of the personal and economic ties lies in which residence the taxpayer has its predominant relationship whereas personal ties weigh more than economic ties. Personal ties are those that connect a person to a place where he has a residence for reasons inherent in him. This refers to family relationships as well as activities of social, religious, and cultural nature and other activities for development, personal interests, and affinity. A summary evaluation of all circumstances is being assessed when determining the center of vital interests.