Difference between investment property and residential house.

Asked by Michael Liu, Gaithersburg, MD Fri Oct 11, 2013

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Rocia Collins, Agent, Corpus Christi, TX
Wed Jun 4, 2014
Hi Michael, As a real estate professional, I know that its important for my clients to understand the tax break opportunities between Residential and Investment properties. I found this article by
by Travis Ames, Demand Media.( Nest 1997-2014) That will help you understand the opportunity cost when finding a home for sale.

"Primary Residence
The home where you live is considered your primary residence. With this in mind, there are a number of write-offs available for you to use. IRS Form 1040 features a number of line-item deductions that you can use to lessen the blow of your tax bill. These deductions include your mortgage interest, property taxes and even the interest on your home equity loan or line of credit for up to $100,000.

Selling Your Residential Property
There are major tax implications for selling your home. If you have lived in the home for two years out of the five prior to its sale, you can make up to $250,000 in profit on it without having to pay any sort of tax. Anything over $250,000 is considered capital gains, which will incur a 15 percent tax. Married couples filing jointly can make up to $500,000 in profit without being hit with the capital gains tax. You can sell a home that qualifies as a primary residence once every two years without any type of penalty or tax, as long as you have lived in that property for two out of five years prior to the sale.

Investment Properties
While there are several immediate tax perks associated with having a primary residence, investment properties are not as favorable when it comes to deductions and credits. Interest on secondary property can be written off for one building only. However, if you rent your investment property, there are a number of write-offs available -- for repairs, for example, or pest control, supplies, cleaning, utility expenses and management costs. Insurance premiums are also deductible for real estate investments.

Selling Your Investment Property
Unlike your residential property, you will have to pay a capital gains tax on any profits you make from the sale of an investment property. The IRS treats any property that you have not lived in for two out of the five years prior to a sale as an investment property, meaning all profits will be taxed. You must report any profits after the sale. Otherwise you will risk being penalized by the IRS. However, you can buy and sell multiple investment properties each year without waiting for a two-year window as you would with residential property.

Tax Deferral on Profit
You can defer paying taxes on your property when you sell if you quickly buy a similar property with the proceeds. Known as a 1031 exchange after the section of the tax code that allows it, the exchange process can be used on a private home. But it is far more commonly used by property investors who use it to defer paying taxes on their transaction gains -- in some cases, for life. In order to accomplish a 1031 exchange, you must declare your intent to do one and you must hire a qualified third party to handle the proceeds of the transactions and document that all the proper rules and regs were followed."

Travis Ames, Demand Media.( Nest 1997-2014)
1 vote
Piero Marinu…, Agent, Silver Spring, MD
Fri Oct 11, 2013
Michael, that all depends on a few variables. An investment property is quite often a residential house. Care to expand on your question?
1 vote
Jonathan Lah…, Agent, Potomac, MD
Sun Apr 17, 2016
Hi Michael,

Here's a link for a helpful tips - http://www.nolo.com/legal-encyclopedia/what-the-difference-b…
0 votes
Ronald Davis, Agent, Millersville, MD
Thu Aug 13, 2015
Without knowing your specific situation an investment property could be:
1) Purchase, repair, and Re-sell
2) Purchase and hold to lease/rent.
0 votes
Brian Nguyen, Mortgage Broker Or Lender, Mission Viejo, CA
Fri Feb 14, 2014
Hi Michael, The difference is actually simple. Usually a residential house or primary residence is the property that you occupy. An investment property is usually non-owner occupied (but not all the time) and usually has some form of income to the owner (such as rental income). These are just some simple difference between the two. Well I hope this helps! If you have any other questions or if you would like a loan, feel free to contact me. Good Luck! Brian Nguyen Sr. Mortgage Banker NMLS # 659743 Phone: 949.667.2887 brian.nguyen@nafinc.com
0 votes
Alex Saenger, Agent, Rockville, MD
Sun Oct 27, 2013
They can be the same. The investment property you own to make money on rental income every month, and more importantly, on the long term capital gains. I believe in rental properties and that now is one of the best times to accumulate them if you can. I believe this so much I just bought another one two months ago and am cash flow positive even before the first mortgage payment is due. If you are interested in putting my Applied Mathematics background to work for you to help you find a great investment property, give me a call or drop me an email.
Web Reference:  Http://www.AlexSaenger.com
0 votes
Jessica Hood…, Agent, Gambrills, MD
Fri Oct 11, 2013
Hi Michael,

An investment property is not owner occupied and is used to generate income (or loss) by the owner. It can be a residential house, condo or town home.

A non-investment property is one you live in.
0 votes
Jim Simms, Mortgage Broker Or Lender, Louisville, KY
Fri Oct 11, 2013
If you are asking because of the difference between the interest rates on an owner occupied house and a rental property it is very simple, you live in one, the other you don’t. The mortgage underwriting rules are entirely different for both. One of the most frequent “how to commit mortgage fraud” questions I receive is how to pretend the rental property is really the primary residence.

Answer, you don’t. Lenders are fanatically auditing every file in their post-closing reviews. Hence, a spike in foreclosures for other reasons than payment default. Most borrowers are not even aware that at lender can and will foreclose even if the loan is current but other provisions of the mortgage are not. Good luck,

Jim Simms
NMLS # 6395
Financing Kentucky One Home at a Time
I answer questions about financing real estate based on my decades of experience dealing with mortgage underwriters. This answer is my personal opinion, has not been reviewed or approved by the company I work for. I do not offer legal or tax advice, if you need answers from an attorney or CPA find one knowledgeable in your local market.
Web Reference:  http://jamessimms.com/
0 votes
Joe Shaver, Agent, Olney, MD
Fri Oct 11, 2013
Hi Michael,

The short answer is an investment property can be any type of home that you plan to use to generate income. You would do this two ways, by purchasing a home and renting it out or by buying a home, fix it up for resale (Also known as Flipping) There are a number of rules associated with both of these options that I will be happy to share with you.

The other option is to purchase a home for use as your primary residence.

Are you interested in purchasing an investment property or do you want to live in the home?

Please contact me for details.
Joe Shaver
0 votes
Sally Grenier, Agent, Boulder, CO
Fri Oct 11, 2013
OR...you could buy a property and LIVE in it as your primary residence first...THEN down the road you can turn it into a rental. But as soon as you turn it into a rental, it's an investment property, and you have to claim the income (and get taxed on it). Again...talk to a CPA.
0 votes
Sally Grenier, Agent, Boulder, CO
Fri Oct 11, 2013
Sounds like youre interested in buying a property as an investment?? You should consult a CPA or tax attorney regarding tax implications. I don't understand what you mean when you say "What if investment property is used as primary home for buyer?" Do you mean if it's a primary home for your RENTER?? Because YOU would be the one buying the home, and renting it out, right?? That's what it means to buy an investment property.

To answer that question -- it's still an investment property. You still have to claim the rent as income.

Talk to a CPA.
0 votes
Michael Liu, Landlord, Gaithersburg, MD
Fri Oct 11, 2013
Sorry I don't know why I can't reply. So I have to reply here. I am new in term of investment property. I know he mortgage rate will be higher, how about the tax rate in Maryland since it get rental income. What if investment property is used as primary home for buyer? What will the tax rate in this situation?
0 votes
Akil Walker, Agent, Upper Marlboro, MD
Fri Oct 11, 2013
Hello Michael,

An investment property is a condo, vacation home, rental home, duplexs, mult-family home you have for the purchased for generating income for you or your company. This can include a residential home. Typlically your resdience is defined as primary home that you live in.

Hope this helps and good luck.
0 votes
Gerard Gilbe…, Other Pro, MD,
Fri Oct 11, 2013
An investment property is one that you are buying to rent out or fix and resell to make money and a residential property is one that you intend to live in. While this is not all inclusive, it is the basic meaning of the terms. A home in a residential neighborhood can easily be an investment property. The determination of whether it is an investment property or a primary residence can also determine the type of loan or financing that can be done and the rate you will be charged.
0 votes
Bill Siegrist, Mortgage Broker Or Lender, Longwood, FL
Fri Oct 11, 2013
A primary residence is typically a 1 to 4 unit property that you are going to occupy within 60 days of purchasing. An investment property is a 1 to 4 unit property that you do not plan to occupy yourself and will be tenant occupied generating rental income.
0 votes
i have a primary residence and im buying an house for my kids which are in college 25 miles away from my house. how i consider this house? a primary? an investment?
Flag Sat Jun 18, 2016
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