What’s the difference between a second home and an investment property?

Having a second home to travel out to for vacations is a luxury that many of us work hard to attain. However, if you decide to rent out your second home during the parts of the year when you aren’t there, can you still call it a second home? The differences between the terms “second home” and “investment property” are more than semantic; they each carry different financial implications and are assessed separately by the IRS. If you’re wondering about the difference between second homes and investment properties, read on to learn more from our team at Zenith Properties NW!

Second Home vs Investment Property: What’s the Difference?

The first difference between these two types of properties is the risk factor in investing that bank lenders see, both on their end and your end. If they know that you are interested in a property for the sake of having a vacation home for your family, you should expect the same interest rates and income requirements as if you were purchasing a permanent home.

However, investment properties have many extra insurance requirements and local regulations to abide by. Additionally, there is not the same guaranteed usage as there is with a second home, making it a riskier venture for both the renter and the lender. For these reasons, you can expect larger down payments and higher interest rates when setting up an investment property mortgage.

Second Homes, Investment Properties, and Taxes

The IRS has strict definitions of the differences between these two types of properties that you must abide by for tax purposes. By definition, a second home must be lived in for at least 14 days a year and 10% of the days you rent it. If you live in your second home for two weeks but rent it out for 200 days, you will not have lived in it for 10% of the days that you rented it (20 days), thereby causing it to be classified as an investment property.

The reason for these distinctions comes in the way they affect your taxes: second homes are eligible for the coveted mortgage interest tax deduction, while investment properties have other benefits, such as being able to deduct your mortgage interest from your rental income as a straightforward expense.

Learn more about Second Homes vs Investment Properties with Zenith Properties NW

There is a lot to know about the distinctions between these two types of properties if you’re looking to make an investment of either kind, so if you have any further questions, don’t hesitate to reach out to our team at Zenith Properties NW. We want to help you make smart investment decisions and enjoy the benefits of your next property however you see fit!