Understanding the differences between a primary residence and a second home—and how your primary residence affects your income tax return—is key to exploring the possibilities for your assets and finances.

Buying a home is one of the most important investments anyone can make in their lifetime. However, many people not only own a property but also have a second home in addition to their primary residence. Each has different implications for rental purposes, although this is not the only issue that concerns many homeowners.

Other common questions include whether a second home can be considered a primary residence and what exactly constitutes a second home. In most cases, one must consult the tax authorities to clarify these concepts; after all, the ability to claim certain expenses as tax deductions on one’s annual tax return depends on this, among other things.

Difference Between a Primary Residence and a Second Home

You’ve probably heard this a thousand times. You may even have used the term incorrectly—but a “first home” is, quite simply, the first property you buy when you don’t own any others.

Although many people use the terms interchangeably, it is common to confuse one’s primary residence with what is known as one’s habitual residence. The latter has more to do with tax matters; indeed, the Tax Agency itself defines an individual’s habitual residence as the place “where they habitually live due to the existence of personal and professional ties.”

But if the question is what constitutes a second home, the most basic definition is that it is one you purchase when you already own another property. Generally speaking, a second home is typically used for leisure, which sometimes also determines its characteristics. A beach apartment, a house in a small town… Most often, these types of properties are located far from one’s primary residence.

Beyond the distinction between a primary and secondary residence, the tax authorities establish certain key criteria for any property to be considered a primary residence for tax purposes. This is not a trivial matter, since—depending on the autonomous community— one’s tax residence for income tax purposes may be subject to different deductions. The two requirements set by the tax authorities for your home to be considered a primary residence are:

• You must have resided there for a continuous period of at least three years.
• You must live there permanently for at least twelve months from the date of purchase or the completion of construction.

There are, however, certain situations in which, even if these requirements are not met, the property would not lose its status as a primary residence. For example, it may be considered as such in the event of death, but also if circumstances require a change of residence (due to separation, marriage, a change in employment, etc.), when it becomes unsuitable due to a disability, or when, because the owner already has a primary residence for work-related reasons, the purchased home is not used.

A key issue from a tax perspective is that the very definition of “habitual residence” precludes a second home from being considered as such. In fact, that is another difference between a primary residence and a second home. A house in a small town or an apartment by the beach are unlikely to be the places where we spend most of our time living.

Implications of the Primary Residence for Income Tax Purposes

Understanding these concepts clearly will help you avoid problems with the tax authorities. To begin with, you should be aware that both your primary residence and your second home must be listed on your income tax return, although the one you designate as your primary residence will allow you to take advantage of certain tax benefits.

For example, there is the option to benefit from an exemption on capital gains from the sale of one’s primary residence, provided that the total amount received “is reinvested in the purchase of another primary residence or in the renovation of a residence that will serve as such.” And there’s more. In the case of a primary residence, it is possible to claim tax deductions for the purchase, provided that the purchase took place before 2013.

On the other hand, whether or not one’s tax address matches one’s usual residence can also make a significant difference. After all, it is the regional tax rates that determine a large part of the personal income tax we pay.

Your tax bill will be increased by your available assets, a category in which you must include your second home. It will be taxed as imputed real estate income. Even if it is not rented out, a percentage of its assessed value will be calculated (2% of the assessed value for personal income tax purposes, or 1.1% if the assessed value was revised after 1994). If you have your second home rented out, you will not need to include it in your taxable income; instead, you must report the income derived from the rental.

How to Make a Second Home Your Primary Residence

Now that we’ve clarified the difference between a primary residence and a second home, as well as how your primary residence affects your income, a common question is whether a second home can be considered your primary residence. The answer is clear: yes. All you would have to do is register your residence there and notify the authorities (preferably by making it your tax residence).

The Ministry of the Treasury’s own website explains how to complete the process, which requires the submission of“Form 030: Taxpayer Registry—Registration, Change of Address, and/or Change of Personal Information.”

However, given that housing deductions have been phased out in recent years, some people have used their second homes to obtain tax advantages through underhanded means. However, the tax authorities have been refining their methods for monitoring taxpayers, and although in many cases they accept the information from the municipal registry as valid, they may even go so far as to check utility usage to verify that the property declared as a primary residence is not, in fact, a second home.