What is the Difference Between Investment Property and Second Home?

The main difference between an investment property and a second home lies in their intended use and the associated tax implications. Here are the key differences:

Intent of the property:

• Second home: A second home is purchased primarily for enjoyment purposes and lived in or visited by the owner, separate from their primary residence. The property must be suitable for year-round occupancy and be a single-unit dwelling.
• Investment property: An investment property is purchased with the intent of generating rental income or flipping and selling for a profit. It can be more than one unit, and investors may buy such properties with the goal of flipping them for sale.

Ownership days:

• Second home: To qualify as a second home, the owner must live there for at least 14 days a year or 10% of the total days rented.
• Investment property: Investment properties can be occupied by the owner for fewer than 14 days of the year.

Rental income and occupation:

• Second home: Second homes can generate rental income when the owner is not living there, but they cannot be rented out more than 180 days of the year. Investment properties, on the other hand, can generate income through long-term rental, short-term rental, or flipping.

Tax deductibles:

• Second home: Owners can claim tax deductions for expenses like mortgage interest, property taxes, insurance, maintenance, utilities, and losses due to damage, as long as they live in the property at least 14 days a year or 10% of the total days rented.
• Investment property: Owners can claim expenditures for mortgage interest, property taxes, insurance, maintenance, utilities, and losses due to damage, as well as depreciation deductions.

Mortgage:

• Second home: Second homes are generally easier and less costly to finance than investment properties. A second home loan will require a minimum down payment of 10%.
• Investment property: Investment property loans typically involve more costs and are harder to qualify for. The minimum down payment starts at 15% and can be higher depending on the lender.

Comparative Table: Investment Property vs Second Home

Here is a table comparing the differences between investment properties and second homes:

In summary, investment properties are purchased with the intent to generate rental income or flip and sell for a profit, while second homes are used as personal vacation homes or alternative residences. Financing for investment properties is generally more difficult and costly than for second homes, and tax benefits also differ between the two.