HOMEBUYERS : How The IRS Defines Second Homes Vs. Investment Properties

Are You Thinking Of Adding More Real Estate To Your Portfolio Of Investments?

Choosing between a second home and an investment property goes beyond walls and roofs – it’s a strategic move that shapes your financial future! Understanding the difference between a second home and an investment property (as defined by the IRS) is key for home buyers.

Here is a breakdown of some key differences between a second home and an investment property:

1. OCCUPANCY MATTERS
According to the IRS an additional property becomes a second home if you occupy it for more than 14 days in a tax year. If the property is used for less than 14 days, there’s another condition that applies to second homes: 10% of the total days it is rented to others at a fair rental price.

2. PERSONAL USE
The personal use of a second home remains in effect when its occupied by tenants paying less than a fair rental price, the owner’s family members, or the property owner or co-owner.

3. TAX INCENTIVES FOR INVESTMENT PROPERTIES
The depreciation of the rental property enables you to recover costs through tax deductions. The IRS permits deductions for expenses based on the property’s cost, the chosen depreciation method, and the recovery period. Mortgage payments and the cost of equipment, fixtures, and furniture canNOT be deducted.

4. DEDUCTIBLE MORTGAGE INTEREST AND REAL ESTATE TAXES
Deductibles for mortgage interest and real estate taxes are eligible only for second homes. While the IRS limits the ability to claim mortgage interest deductibles there is a distinct tax incentive for investment property owners.

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