Purchasing your first property is a milestone in life. Later down the road, you may consider purchasing a second property to use as a rental property. If so, you need to understand that there are differences in occupancy terms between the house you reside in and the properties you rent out.
There are a few different variations including owner occupant, also called owner-occupied; vacation properties; rental properties and owner-occupied rental properties. In the eyes of your mortgage lender, property tax authority and the IRS, the different designations are meaningful for their calculations of interest, tax rates and deductions.
Understanding Owner-Occupied Properties
The home you live in the majority of the time is considered your primary residence and is classified as owner-occupied. The address listed on your driver's license is considered proof of your official residence. If you own another property that you use primarily for vacationing, this is generally considered your second home. Vacation properties aren't always considered rental properties, as it depends on the amount of time you occupy the property for personal use.
Purchasing Rental Properties
Purchasing a property to rent out might be a good strategy to earn extra income if your lifestyle can accommodate the additional time required to be a landlord. Generally, mortgage companies charge higher interest rates on properties that are not owner-occupied, meaning you won't be living in the house regularly. So, be prepared to see a higher interest rate than on your first mortgage. Rental properties are also considered investment properties, which will create income tax consequences.
Owner-Occupied Rental Property
For most single-family homes, the distinction between owner-occupied or rental is generally clear-cut. However, there are some people who own multiunit properties that contain a number of separate living spaces. These are common in large cities, such as New York.
For example, a townhouse might hold your family's living area on the top floors and a basement apartment with a separate entrance blocked off from the rest of the home. The homeowners live here, but they also receive income from renting out a portion of the home. This type of arrangement is considered owner-occupied rental property. It has grown in popularity among young and established couples alike who are looking for a boost in income to help with the expenses of home ownership.
Comparing the Costs
Lenders will most likely charge a lower rate on owner-occupant mortgage loans versus an investment property. Additionally, some counties and municipalities offer some type of property tax rate reduction for primary residences.
When it comes to your federal tax return, the filing rules are different for owner occupant and rental properties. In general, you can claim property taxes and mortgage interest on your primary residence as a deduction.
Property owned for investment purposes generates income, so the income will need to be disclosed. However, there are still deductions available such as upkeep costs and depreciation factors that can lower the total tax liability on the rental income. Your tax preparer can answer questions related to your specific situation.
- Tax Consequences of Converting a Rental Property Back Into a Dwelling
- Rules for FHA Owner-Occupied
- Tax Deductions for Renting Out a Room in Your House
- Do Investment Properties Qualify for a Loan Modification?
- Can I Deduct My House Rent on My Personal Income Tax Return?
- How Should a Married Couple Treat Rental Property?
- How to Determine Depreciation of Land Vs. House
- What is a Betterment Tax?