Second Home vs Investment Property: What Are the Differences?

Second home vs investment property might sound like interchangeable terms to the uninitiated. In reality, those two different statuses of a property can carry enormous potential differences in tax and the laws applied.

Not only can tax be an issue, but so can the lending requirement to buy the property. It’s worth understanding the differences so that you don’t make any mistakes financially.

By covering a few of the fundamentals of investment property and second homeownership, we can shed some light on the differences that matter. Let’s read on to see where the vacation ends and the investment begins.

What Constitutes a Second Home

If you’ve never invested in extra property before, the actual definition of a second home can seem very loose. When classifying a second home, it boils down to whether or not you have stayed there for a meaningful period.

The difficulty here is that there’s no real separation between staying somewhere a few weeks and staying for a few months. Both situations will end up having the property labeled as a second home.

You’ll often know that this is the situation you are getting into if you go through the process to get a second home mortgage. Those mortgages will state that the home must exist for your exclusive use.

How Investment Property Differs

As the name implies, the defining factor of investment property is purchasing it for profit. For a residential building, this could be rental fees.

Investment and second home property purchases share much of the same barriers. There are subtle differences, though. For example, your credit score isn’t as much of an issue when asking for a loan to buy an investment property.

Almost all of these differences stem from the fact that an investment property will generate revenue of some kind. Whether it is thanks to monthly rent, or flipping the property.

Second Home vs Investment Property Tax

The other major difference between a second home and an investment property is how they are taxed. Not only that, the IRS will have their own opinion about what constitutes a second home.

They classify a property as a second home if you meet one of two requirements.

Either you have stayed in the property for more than 14 days in a year or stayed there for more than 10% of the days you have rented it.

On the plus side, there are a variety of tax deductions that you can look into if you are planning a second home. Whether it’s a beach-side holiday home or some apartments for sale, make sure you have all of your paperwork in order.

Making Smart Investments

If you’re deciding between a second home vs investment property for a way to invest your money, both are a good idea. Property is one of the most valuable commodities you can own, no matter how it’s classified.

If you’re looking for other tips that help you put your money in the right place, read more of our blog! From business ideas to financial know-how, our articles cover all the bases to help you spend smart!