Second Home vs. Investment Property: Which Is Right for You?

June 29, 2023

Understanding the differences between purchasing a second home vs. investment property is crucial for anyone interested in expanding their wealth potential. You may have heard “Investment property” and “second home” terms used interchangeably, but they have distinct differences (especially from the IRS’ perspective!). We'll define these key differences in investment property vs. second home, including both options' purpose, financing, and tax implications.

Difference between Second Home and Investment Property

Purpose & Use:

  • Second Home: People typically purchase a second home for personal use, often using it as a vacation home or part-time place of residence. The IRS second home vs. investment property guideline stipulates that you must live in a house for at least 14 days each year or more than 10% of the number of days it is rented, whichever is longer, to qualify it as a second home.
  • Investment Property: On the other hand, the purpose of an investment property is income generation (NOT personal use), usually through renting it out to tenants. The owner is not required to occupy an investment property at any time.

Financing Options for Investment Property vs. Second Home:

  • Second Home: Usually, you can avail of lower interest rates and a smaller down payment for a second home compared to an investment property. Lenders generally consider second homes to be a lower risk.
  • Investment Property: In general, financing an investment property comes with higher interest rates and a larger down payment, as lenders view these properties as having a higher risk than second homes.

Tax Implications & Benefits:

  • Second Home: For a second home, mortgage interest and property taxes are deductible within certain limits. However, rental income is considered taxable.
  • Investment Property: With investment properties, expenses such as mortgage interest, property taxes, maintenance, and depreciation can be deducted from rental income, potentially lowering your taxable income. Moreover, the IRS allows investment property owners to depreciate the cost of the property over time, which can be a significant tax benefit. 

To learn more about the tax benefits of a second home vs. investment property, we recommend starting with this article on Investopedia. You can also read the IRS second home vs. investment property perspective on the IRS website.

 

Now that you know the difference between a second home and an investment property, what’s next?

Choosing between an investment property or second home depends on your financial goals and how you want to use the property. A second home provides both a personal retreat and some tax benefits, while owning an investment property generates income with some tax deductions. If defining your financial goals or weighing the pros and cons of an investment property vs. a second home is daunting for you, don’t hesitate to contact Leslie & the team at KPT - we’ll be happy to help you make an informed decision.

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