Defining “Principal Residence” for Affordable Housing Purposes
Virtually all affordable housing programs, including Section 8 and the Low-Income Housing Tax Credit (LIHTC), require that the lessees of the unit use apartments being rented under the applicable program as a “principal residence”. Agencies have not provided a lot of guidance regarding how to define a “principal residence.” A common definition of “principal residence” is the home that a person physically occupies and personally uses the most.
The tax code provides no specific definition. With regard to tax law, whether or not a taxpayer uses a property as his principal residence depends on all the facts and circumstances in each case, including the good faith of the taxpayer. Clearly, if someone lives in the same home for years and considers it to be their only home, it is clearly a principal residence. At the same time, taking a couple of weeks vacation from the home each year does not create a situation where the home is no longer a principal residence.
But what about longer absences? The IRS has provided the following example: “Professor Paul Beard, who is single, bought and moved into a house on August 28, 2001. He lived in it as his main home continuously until January 5, 2003, when he went abroad for a one-year sabbatical leave. During part of the period of leave, the house was unoccupied, and during the rest of the period, he rented it. On January 6, 2004, he sold the house at a gain. Because his leave was not a short, temporary absence, he cannot include the period of leave to meet the two-year use test.” The IRS does concede that ownership and use requirements do not have to be continuous, but clearly they intend that it be the main place of residence.
A recent court case in Massachusetts has provided some additional guidance on what constitutes a “principal residence.” In Boston Redevelopment Authority v. Pham (2015), the Massachusetts Court of Appeals affirmed a Superior Court decision that the owner of an affordable housing condominium unit did not violate the deed, affordable housing covenant, and other documents’ restrictions on the use of the unit as the owner’s principal residence by using the unit as the home base for extensive business travel and by taking roommates to share housing costs.
While this case involved a condo purchase and not a rental apartment, the definitional issues considered by the court are instructional for rental housing.
The condominium covenant required Pham to occupy the unit as his principal residence. The determination of whether he occupied the unit as his principal residence is a mixed question of law and fact.
As the phrase “occupy as principal residence” was not defined in the covenant or other documents (and it is not usually defined in rental leases), the trial court reasonably considered factors such as: (1) Pham neither leased nor owned property elsewhere; (2) he used the unit as his home base despite his extensive work-related travel; (3) Pham kept a room in the unit and was physically present there for one to two weeks per month; (4) he maintained his valuable personal possessions there; (5) he identified the unit as his tax address and address for other official purposes; and (6) he kept the utilities in his name and paid those bills.
Leases generally do not prevent residents of affordable housing from taking jobs demanding frequent travel, assuming they maintain the affordable housing unit as their home. Such restrictions would conflict with the goals of aiding persons of moderate and middle income.
The court found that Pham was an owner/occupier of the unit for residential purposes, and had not leased the entire unit for business, speculative, or investment purposes.
When determining whether an affordable unit is the principal residence, the issues noted above should be considered. Basically, it will boil down to a “facts and circumstance” test, but if it is clear that the apartment is the primary home of the resident – even if they are gone for extended periods of time – it should be considered the principal residence.