That depends on whether you're looking at the IRS interpretation or a lender's guidelines -

The differences between Second Home and Investment Property status came up in a recent transaction, so let's touch on them again today. Our busier season is just around the corner and online inquiries are already picking up.

Each year, buyers from "up north" start looking at properties with various ideas in mind about how a home here might best be used. Let's be sure they have good information about the distinction between Second Homes and Investment Properties.

The IRS definition deals with tax deductibility, while the lender's determines interest rate and down payment.

The IRS is concerned with taxable basis -

mortgage lenders focus on risk management.

The 3 main categories of residential real estate occupancy and use are:

Primary Residence

Second Home

Investment Property

Within the same loan program (conventional 30-year fixed for example) and for the same qualifying borrower, a Primary Residence purchase will have a lower interest rate than a Second Home, and a Second Home will have a lower rate than an Investment Property.

Maximum initial LTVs (Loan-To-Value ratios) are usually higher for Primary, lower for Second Homes, and lower still for Investment Properties. Graphically, the differences might be:

	Maximum LTV	Minimum Down Payment	Nominal Interest Rate
Primary Residence	95%	5%	4.0%
Second Home	85%	15%	4.50%
Investment Property	70%	30%	5.0%

(For mathematical example and illustration only)

This shows that a higher down payment is needed for Second Homes and Investment Properties, along with a higher interest rate on the mortgage loan. From a lender's perspective, Primary Residence loans carry less risk than Second or Investment Properties because an owner is much less likely to default on a Primary Residence.

Although there can be case-by-case exceptions, generally an owner may have only 1 Primary Residence and 1 designated

Second Home. Any other properties owned are then considered Investment Properties, or "Non-Owner Occupied" as they are referred to in lenders' guidelines..

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 drivers license and vehicle registration
          - Mail delivery
          - 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.

In their "Home Mortgage Interest Deduction" booklet 936, the IRS calls a second home "a home that you choose to treat as your second home". Yes, really.

They go on to say that if this second home is not rented out, it is automatically considered a "qualified home" for tax purposes even if the owner doesn't use it during the year.

As such, any mortgage interest paid during the year on a qualified Second Home is tax deductible when itemizing deductions, the same as for a Primary Residence. This is limited to interest paid on combined mortgage debt (primary and second homes) up to one million dollars. That's the total amount of the outstanding mortgage balances, not the total interest paid.

When a Second Home is rented to someone else for part of the year (seasonal rental for example), 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.

If an owner doesn't stay at this home long enough in that given year, it is then treated as rental property (not a second home) and the mortgage interest deduction is handled differently.

When buyers have questions about the taxability of property, refer them to a licensed CPA or other tax professional.

Lenders view Second Homes quite differently -

For our discussion today, we're going to use FNMA's (Federal National Mortgage Association or "Fannie Mae") guidelines which are considered the benchmark for conventional (non-government insured) mortgage qualifying standards.

FNMA's current Second Home standards are:

- 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/owner has exclusive control over property

     - No rental or timeshare arrangements

        (not even to family members, neither annual nor short-term)

     - If a property management company is used, it cannot

         control occupancy (be a rental agent)

Here's a chart to help compare and contrast the differences in Second Home guidelines between the IRS and mortgage lenders:

	IRS	Lender
Periodic Rentals	OK	No
Owner Occupancy	Minimums	Open
Location	Open	Distance
Rental Management	OK	No

(Consult a licensed tax professional for detailed IRS guidelines)

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

Remember that loans for Investment Property carry higher interest rates and require higher down payments than loans for Second Homes.

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

At loan application a property's intended occupancy and use are declared, becoming a material part of the signed application.

Misrepresenting the intended use and occupancy

of a property is mortgage fraud, a violation of Federal law.

Many buyers are interested in Second Homes here in South Florida. It's important for them to understand how a property's use is viewed by lenders and what financing options are available to them. Once they do, they can make an informed decision that fits into their overall financial plans.

When buyers have questions about taxation

for a potential property purchase, have them consult

a licensed CPA or other tax professional.

For questions about financing a Second Home

or Investment Property, have them get in touch with a knowledgeable Lender and Loan Originator.

When buyers are well-informed, know what to expect, and are properly guided through the transaction, everyone arrives at the closing table relaxed and on time.