What’s the difference between a second home vs. an investment property? From residency requirements to financing criteria to tax deductions, these seemingly similar housing options are actually not interchangeable at all. In this blog, we’ll break down:
- Second home vs. investment property residency requirements
- Differences in loan types, including interest rate and down payment expectations
- Tax benefits of a second home vs. an investment property
Second Home vs. Investment Property Residency Requirements
In the mortgage world, the home you live in for the majority of the year is called your primary residence. A second home is not a primary residency, but it is the owner’s residence at some point in the year. Specifically, the owner must live in the home for some portion of the year for it to be considered a second home. These are less formally known as vacation homes, because generally, owners use them for vacations, holidays, or other temporary living situations. Unlike an investment property, typically a second home cannot be used as a rental property, although there may be some exceptions. Always check the IRS guidelines before deciding to rent out your second home.
An investment property is not a primary residence, or the owner’s residence at all. Many people also call these rental properties, because generally, the owners make side income by renting out their investment property to tourists and vacationers, or to more long-term tenants who pay rent.
Financing Differences Between a Second Home and Investment Property
For a second home mortgage, you’re likely to see lower interest rates and down payment requirements than an investment property mortgage. Loans for a second home function similarly to loans for a primary residence, but may not be eligible for programs like down payment assistance.
An investment property mortgage is what we call a business purpose loan—a loan for a non-owner occupied rental property. Mortgages for investment properties tend to come with higher interest rates and often require larger down payments. These two factors are designed to protect the lender in the event that the borrower fails to pay their investment property mortgage. Most lenders consider these types of home loans to be riskier. Why? Since the buyer doesn’t live in this home, they might be more inclined to walk away in the event of financial adversity.
Tax Benefits of a Second Home vs. Investment Property
For a second home, you can typically qualify for standard homeowner deductions, like property taxes and interest.
Investment homes offer some unique tax benefits. In addition to property taxes and interest write-offs, you may also be able to claim write-offs for expenses like maintenance, insurance, and utilities. Check the IRS site for the most recent updates on potential investment property deductions.
Key Takeaways
In a nutshell, second homes and investment properties have two separate, distinct uses. If you’re looking to purchase a home that you plan to personally use throughout the year for trips, holidays, and more, a second home mortgage is what you need. If your goal is to make income by renting out a property, an investment property mortgage is the right fit. Whatever your goals, we’re here to help.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before making the decision to buy or refinance a home.
Investment properties are not occupied by the owner, while second homes must be occupied by the owner for a portion of the year.
