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Is A Second Home The Same As An Investment Property?

By Christopher Carter - Real Estate Broker Associate

July 6, 2023

In the past few years, thousands of buyers from "up north" have purchased houses and condos in Florida with various ideas in mind about how that property might be used. Some intend to relocate here full-time, some want to be seasonal residents until they become full-time at some point in the future, some want to own property they can offer to visitors and snowbird rentals for short-term occupancy.

It is important for all of them to have accurate information about the difference between Second Homes and Investment/Rental Properties.

Many potential buyers, Real Estate Agents, and new owners are asking today's headline question. The answer depends on whether you're looking at mortgage lenders' guidelines, IRS interpretation, or Condo/Homeowners Association rules.

Mortgage lenders focus on risk management, the IRS is concerned with taxation and deductibility of costs, COA’s and HOA’s want to preserve property values.

The 3 main categories of Residential Real Estate Occupancy and use are:
• Primary Residence
• Second Home
• Investment Property (also called Non-Owner Occupied)

Within the same Mortgage Loan Program (30-year fixed for example) and for the same borrower, a Primary Residence Mortgage will have a lower interest rate than a Second Home, and a Second Home will have a lower rate than an Investment Property. When applying for a Mortgage, buyers sign a statement declaring their intended occupancy of the property.

Lenders' maximum Loan-To-Value ratios (LTVs) are higher for Primary, lower for Second Homes, and lower still for Investment Properties. This means that a higher down payment is needed for Second Homes and Investment Properties.

From a lender's perspective, Primary Residence loans carry less risk than Second or Investment Properties because an owner/borrower is much less likely to default on a Primary Residence.

Primary Residence is defined similarly by most all interpretations. It refers to where a person lives for most of the calendar year, based on things like:
• Close to employment
• Address on Driver's License and Vehicle Registration
• Mail delivery
• Utility usage
• Local family, Business, Church, and social affiliation
• Address on Federal and State Income Tax Returns
• Voter Registration

When we talk about Second Homes, things get a little blurry depending on whether you're filing Tax Returns or applying for a Mortgage.

IRS Publication 936 (Home Mortgage Interest Deduction), addresses how Mortgage Interest is treated on Primary and Second Homes. Here is a direct link to it:

IRS guidance explains that if a Second Home is not rented to others, it is automatically considered a "qualified home" for tax purposes even if the owner doesn't use it during a given calendar year.

As such, any mortgage interest paid during the year on a qualified Second Home is Tax Deductible when itemizing deductions on Personal Income Tax Returns, the same as for a Primary Residence. This is limited to the Interest paid on Combined Mortgage Debt (not property values) on Primary and Second Homes up to a certain amount depending on filing status.

When a Second Home is rented to someone else for part of the year (seasonal or vacation rental), the IRS says the owner must also stay in the home "more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer" in order to deduct Mortgage Interest itemized on a Personal Tax Return.

If the owner does not live in the Second Home for at least that period of time, the IRS then calls it a rental property, which requires different Tax Accounting on the owner's Tax Return. See IRS Publication 527 (Residential Rental Property) for details. Here's the direct link:

If you are showing Second Home Rental Income on your Tax Return, be sure your own occupancy of the property is documented, consult a tax professional for application to your specific circumstances.

Lenders view Second Homes quite differently - For our discussion today, we are using FNMA's (Federal National Mortgage Association or "Fannie Mae") Guidelines which are considered the benchmark for conventional (non-government insured) Mortgage qualifying standards.

Government-Insured Mortgage Financing (FHA, VA, USDA) is only for Primary Residences. Second Homes and Investment Properties are not eligible for FHA, VA, or USDA Mortgage Financing Programs.

FNMA's current Second Home guidelines include:
• Reasonable distance from Primary Residence (usually at least 50 miles)
• Occupied by borrower some portion of the year
• Restricted to 1-unit dwellings (single-family home or individual condo unit)
• Suitable for year-round occupancy
• Borrower has exclusive control over occupancy (no Management Company or Real Estate Agent approving or declining rentals)
• No rentals for at least the first year of ownership

Under either IRS or lender guidelines, if a property's use doesn't conform to all Second Home guidelines and requirements, it defaults to rental or Investment Property status which is property purchased with the intent of producing cash flow and/or price appreciation.

Just because the IRS says something is OK for Tax Purposes, that doesn't mean mortgage lenders look at things the same way in terms of their risk management.

Remember - loans for Investment Property carry higher interest rates and require higher down payments than loans for Second Homes, and Second Home mortgages have higher interest rates and down payments than those for Primary Residences. For years, occupancy misrepresentation to receive a better rate and terms has been one of the most committed types of Mortgage Fraud in Florida. Mortgage Fraud is a violation of Federal law.

It seems logical that any property rented to others on an annual lease is almost automatically categorized as an Investment Property by the IRS, mortgage lenders, Owners Associations, and just about any other occupancy standard.

Another difference between Primary, Second Home, and Investment Properties comes into play with properties governed by either Condominium or Homeowners Associations. Many Associations limit Non-Owner Occupied (Investment) ownership. And when there are too many NOO Properties in a building or community, lenders are hesitant to extend purchase financing for individual properties in it. Study your Association's Governing Documents for details and restrictions related to owner and tenant occupancies.

Violations of your Association's Governing Docs can result in fines and restricted use of the building or community's amenities.

There is another major occupancy issue for buyers to consider - Florida's very attractive Homestead Protection for Permanent Residents. Depending on how long owners themselves plan to live here each year, they may not qualify for Homestead status on their Florida properties. Owners who have already established Homestead Status and rent out their properties for too long or too frequently can be considered as abandoning their Homesteads, losing the benefits that go along with it.

Second Home and Investment Property occupancies are ineligible for Homestead.

It is important to keep in mind that for all of these occupancies, non-immediate family or friends/acquaintances are not owner occupancy if the property owner is not there at the same time. This distinction is made very clear in many Florida Condominium Buildings' recorded Governing Docs.

Whether you are a potential buyer or a current owner of a Florida house or condo, it is important to understand the various rules that apply to the use and occupancy of your property.

Answering our headline question - no, a Second Home is not the same as an Investment Property, and the rules governing each of them changes depending on whether you ask the IRS, your mortgage lender, or your COA/HOA Board.

Editor's Note: Christopher Carter is NOT an attorney. He does not give legal advice. For interpretation and application to specific circumstances of anything you read in this article, you must speak with a Florida-Licensed attorney.

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