If you’ve been comparing mortgage rates for the purchase of a second home or an investment property, you’re already on a promising path: You’ll either have a place to go for vacations, or you’ll have a place that’ll generate income and put more money in your pocket.
Either way, the opportunity to own more than one property is an enviable position to be in, but how you classify that property makes a difference in how much you’ll pay to finance and own it.
Second home vs. investment property
Are you buying a second home, or are you making an investment?
This might be confusing, especially if you’re thinking about occasionally renting out the property – using it regularly for vacation, for example, but also making it available on Airbnb for some of the time you’re not using the property and instead are living in your primary residence.
Earning some money from your property doesn’t automatically make it an investment, however. Accurately defining the piece of property depends on how much time you spend in it.
Elliot Pepper, co-founder, certified financial planner and director of tax at Northbrook Financial in Baltimore says that you need to pay attention to what he calls “the 14-day limit rule.”
“Very broadly speaking, if you personally live in your second home for 14 days or fewer – or less than 10 percent of the days it is rented – during a year, then it would be considered a rental property and the income earned would be taxable,” Pepper says, “but you would also deduct the expenses associated with the property.”
On the flip side, if you use the property for more than 14 days or more than 10 percent of the time it’s rented,