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

It's that time again! Now that we're into our winter visitor "snowbird" season, this topic gains increased relevance and comes up quite often in local real estate offices. So, each year I update and resend this edition to help you answer new buyers' questions.

For a few months, buyers "up north" have been online, looking at properties here with various ideas about how a South Florida home might be used. Be sure they have accurate information about how Second Homes differ from  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 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 (also referred to as Non-Owner Occupied by lenders).
 
In addition, maximum initial  LTVs (Loan-To-Value ratios) are higher for Primary, lower for Second Homes, even lower for Investment Properties.
 
Graphically, the differences might be:
  

Maximum
Initial
LTV
Minimum
Down Payment
In terest
Rate
(Nominal)
Primary Residence 95% 5% X.0 %
Second
Home
85% 15% X + .50%
Investment Property 70% 30% X + 1.0%
(For mathematical example and illustration only - not an available loan program)
  
This means that a higher down payment is needed for Second Homes and Investment Properties.
  
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 1 Primary Residence and 1 designated
Second Home. Any other properties owned are considered
Investment Properties.
  
Primary Residence is defined similarly by most 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
 
We discussed some of these same criteria in our newsletter on Florida's Homestead Laws, which I'll resend before the March 1st filing deadline for new owners.
 
When we talk about Second Homes, things get a little fuzzy, 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 on the owner's personal 1040 tax return when itemizing deductions, the same as for a Primary Residence. People who use the standard deduction and do NOT itemize cannot deduct mortgage interest.

 

This is limited to the interest paid on combined mortgage debt (Primary and Second Homes) up to one million dollars. That's the combined amount of the outstanding mortgages, not the total interest paid, nor the market value or purchase price of the properties.

 

Important Note:

 

The requirements and limits mentioned above are based on current filing guidelines for the 2017 tax year (due in April 2018). Federal "Tax Reform" recently passed by Congress changes the

guidelines and limits for future tax years.

 

Consult a tax professional or licensed CPA

for details and applicability to specific situations.

 

 

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 the owner does not stay at this home long enough in that given year, it is then treated as rental property, not a Second Home. In that case, the mortgage interest deduction is handled differently, usually as a line-item expense offsetting rental income on the Schedule E  (Supplemental Income and Loss) attached to a tax return.

 

See your tax professional or CPA for details and applicability.

 

 

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.
 
Government-insured mortgage programs (FHA, VA, USDA) cannot be used for Second Homes or Investment Properties. Buyers using these programs must occupy as their Primary Residence.
 
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   
       - If a property management company is used, it cannot
         control occupancy (be a rental agent)  
  
Here's a chart showing the basic differences in Second Home guidelines between the IRS and mortgage lenders:
  
IRS Lender
Periodic
Rentals
OK
Not
Allowed
Owner Occupancy Minimums Open
Location Open Distance
Rental Management OK
Not
Allowed
( 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 a property's intended use when applying
for a loan i s Mortgage Fraud, a violation of Federal law.
 
  
Many potential 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 may be available to them.
  
Just as important is how the IRS handles the taxable basis of their real estate. Once they have accurate information, buyers can make decisions that fit into their overall financial plans.
  
Even when they pay cash, buyers may want to take advantage of Delayed Financing or refinancing at some point after closing. If that's the case, this discussion also applies to them.
  
Call me when you first start working with new buyers...
  
...whether they're looking for a Primary Residence, Second Home, or Investment Property.
  
Well informed buyers, sellers, and Realtors ® help make our transactions so much smoother.

" Providing exceptional service

to Naples, FL buyers and their Realtors®"

 

 

Chris Carter                          Mortgage Advisor and Originator
239 898-5455 cell                                        NMLS 861361
 
 
 
 
Geneva Financial, LLC
  Mortgage Bankers
 
Corporate Headquarters:
1018 East Guadelupe Rd
Tempe, AZ   85283
  
  
   © Chris Carter 2017

 

December 27, 2017

 

                                 
Chris Carter


  
Mortgage Advisor
and Originator
 NMLS 861361
  
 



  

239 898-5455 cell
 
 
 
 
 
Naples, FL
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
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