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The general rule is that a participant loan must be repaid within five (5) years to avoid distribution treatment. However, this does not apply to any loan used to acquire any dwelling unit which, within a reasonable period of time, is to be used as the participant’s principal residence. The determination as to whether a dwelling unit is used as a principal residence is made at the time the loan is made.

“Principal residence” has the same meaning as under Internal Revenue Code Section 121 (concerning the exclusion of gain from the sale of a principal residence).

The regulations under this section provide guidance as to what is a principal residence.

Residence

Whether property is used as a person’s residence depends upon all the facts and circumstances. It may include a houseboat or a house trailer.

Principal Residence

Whether property is used by a person as the person’s principal residence depends upon all the facts and circumstances. If a person alternates between two properties, using each as a residence for successive periods of time, the property the person uses a majority of the time during the year ordinarily will be considered the principal residence.

Other relevant factors in determining the principal residence include:

1. the person’s place of employment;
2. the principal place of abode of the person’s family members;
3. the address listed on the person’s federal and state tax returns, driver’s license, automobile registration and Voter registration card;
4. the person’s mailing address for bills and correspondence;
5. the location of the person’s banks; and
6. the location of religious organizations and recreational clubs with which the person is affiliated.

Vacant Land

Generally, vacant land is not a person’s principal residence unless -

1. the vacant land is adjacent to land containing the dwelling unit of the person’s principal residence;
2. the person owned and used the vacant land as part of the person’s principal residence;
3. the person sells or exchanges the dwelling unit in a sale or exchange that meets
4. the requirements of Internal Revenue Code Section 121 within two (2) years before or two (2) years after the date of the sale or exchange of the vacant land; and
5. the requirements of Internal Revenue Code Section 121 have otherwise been met with respect to the vacant land.

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