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The Mortgage Underwriting Process Explained - Quicken Loans Zing Blog

The type of property you want to purchase affects the mortgage interest rate you can receive. There are three potential classifications for the property: a primary residence, a secondary residence and an investment property.

Understanding each classification can help you avoid high interest rates and tax implications when purchasing additional properties.

Primary Residence

A primary residence is the main home someone inhabits. Your primary property can be an apartment, a houseboat or another form of property that you live in most of the year.

Primary residences tend to qualify for the lowest mortgage rates. For your home to qualify as your primary property, here are some of the requirements:

  • You must live there most of the year.
  • It must be a convenient distance from your place of employment.
  • You need documentation to prove your residence. You can use your voter registration, tax return, etc.

There are some aspects of a primary residence that are tax-deductible. As of 2018, homeowners can deduct mortgage interest on loans up to $750,000. This amount can include primary and secondary residences. You can also claim your mortgage insurance payments if you purchased your home after 2006. If you choose to include these deductions on your tax return, you will have to itemize your deductions instead of claiming the standard deduction.

You can classify one property as your primary residence. If you’re married, you and your spouse must claim the same property as your primary home.

In addition, once you’ve bought the property, you must occupy it within 60 days following closing. If the loan originates through the VA, and you’re on active duty, your spouse can satisfy the occupancy requirement.

If you plan to turn the property into an investment or rental property within 6 months of closing, you must classify it as an investment property.

Secondary Residence

When purchasing a second home, you may need a higher credit score to qualify, and you might receive a higher interest rate due to increased risk for the lender. Lenders will review your financials and evaluate your loan-to-value ratio, or LTV. Depending on the lender’s LTV ratio requirements, you may need to provide a large down payment.

On the other hand, neither of these things may happen – each situation is different. A second home must have the following characteristics:

  • It must be a reasonable distance from your primary residence. Generally, lenders want it to be no more than 100 miles away.
  • It must be exclusively under your control and not subject to a rental, time-share or property management agreement.
  • You must live there. While someone other than you can also live in your home, some lenders may limit how long a tenant can live there as opposed to the owner.

The property must be accessible by car year-round. Although it’s cool, your Dr. Evil-style lair that’s built into the side of a volcano and reachable only by helicopter won’t qualify.

You can rent it out for up to two weeks and keep the income tax-free. If you rent for 15 or more days, you’ll have to report the income, but you may be able to deduct certain things, such as rental expenses. It’s important to note that either your lender or the investor in your mortgage may place special limits on how often you rent the property.

At Quicken Loans®, the property may qualify as a second home if it’s rented out for no more than 180 days in a calendar year. You must stay in the home for the larger part of the 180 days or for 10% of the days when you would otherwise rent out the home.

Second homes also qualify for the mortgage interest tax deduction, although if you’re renting  out the home, you have to be careful. In order to qualify for the deduction, you must use the home for more than 14 days or more than 10% of the days when you would normally rent it out, whichever is greater.

For example, if you rented out your home in Florida for 6 months – or about 180 days – between May and October (inclusive), you would still be able to classify your home as a second home for tax purposes if you stayed there for more than 18 days. That would be more than 10% of the days you rented it. A time-share used in this way also qualifies for the tax deduction.

Investment Property

An investment property is a property you plan to use as a rental or to generate income. It  has the following characteristics:

  • The property can be a condo, house or a multi- or single unit.
  • It typically requires a large down payment and more LTV restrictions.
  • Mortgage rates tend to be a lot higher than for other properties, due to the higher risk the lender must take on.

Investment properties can be the most challenging properties to finance.  Guidelines for approving an investment property loan can vary by lender. It’s important to compare all your mortgage options and identify the best lender for your loan.

You must report all income generated from your rental property on your tax return. The owner may also deduct expenses such as the cost of materials to maintain the property, interest and taxes.

How to Convert a Property to Your Primary Residence

You may assume that to change your primary residence, you can simply move into your investment property or secondary home and call it a day, but that’s not the case. With the tax advantages that primary properties offer, the IRS wants to make sure to get a cut. If you decide you would like to move into your investment property, know that many property owners choose to complete a 1031 exchange.

A 1031 exchange allows rental property owners to purchase another rental property with the proceeds from the sale of a previous rental. Essentially, this is exchanging one rental for another.

This helps the owner minimize capital gains taxes and depreciation rapture taxes. To receive any gains exclusions, you must own the property for 5 years and live in it for 2. Then, the property owner can move into the property and start the process of converting the home into the primary residence.

You will need to contact your mortgage lender to see if someone is required to live in your current residence while you live in your rental. If so, you will need to find renters to use the property.

Keep in mind, if you decide not to do a 1031 exchange, you may end up paying more capital gains and depreciation taxes. It’s important to work with a tax professional to help you determine the best strategy for your situation. Converting properties can be complex. Having an expert by your side will help you avoid penalties and additional tax burdens.

The Bottom Line

If you’re considering a purchase of additional properties, make sure it makes financial sense. Work with a tax professional and a lender to determine the best direction to pursue.

Are you considering the purchase of a property for a rental? What are some of the obstacles you have encountered? We want to hear from you. Please leave your comments below.

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This Post Has 150 Comments

  1. I’m buying a home about an hour away from work. I plan to live here, will be transferring my driver’s license and car registration here, etc., but I plan to also maintain a rental apartment in the city for nights when I’m working late or very busy at the office. Is it going to be a problem claiming that home as my primary residence? I own no other real property.

    1. Hi Greg:

      There’s no specific stipulation regarding how often you have to be there, but you have to occupy the property for the majority of the year. As long as that’s the case, you should be okay.

      Thanks,
      Kevin Graham

  2. I purchased a second home with a co owner 9 years ago. For the last four years it has been rented out. I want to refinance in my name only now but it would be considered an investment property. How long after the renter’s lease is up and they have moved do I have to wait before I can refinance it as a second home?

    1. Hi Norma:

      That’s a very good question that I don’t have the answer to. I’m going to recommend you speak with one of our Home Loan Experts by filling out this form or calling 888-728-4702. They should be able to help you.

      Thanks,
      Kevin Graham

  3. I bought a home as an investment property and rented it for 9 months. I am wanting to move into it as a primary residence. Will that affect my loan? Do I need to inform my mortgagee? I should note that this is one of 11 rental houses that I own, but I have only owned this one for a year.

    1. Hi Mac:

      I would inform your lender and see if there’s anything they need you to do and you can go from there.

      Thanks,
      Kevin

  4. We purchased house 3 years back and was our primary residence. Recently due to job change, we had to move out to different city. So, we rented the house and currently living in apartment in different city. So, practically we own single house. Does that house considered as primary residence for mortgage and tax purpose? Or it is considered as investment property as we are getting rental income from the house? Thanks!

    1. Hi Chirag:

      The first thing you need to think about is that you’re doing a primary property to investment property conversion. Your loan documents should specify how long you have to occupy the property as your primary residence. Since it’s been three years, I’m thinking you’re OK, but it’s something the check into. When you do the conversion, you keep your primary property rate, but the mortgage company does have to know that you’re no longer living there and that it is an investment property at this point. They’ll probably require certain documentation like your lease agreement. It’s also an investment property for tax purposes. This means you can’t deduct your mortgage interest. However, other things like upkeep of the rental may be tax-deductible.

      Thanks,
      Kevin

  5. My husband and I have a primary residence, and recently bought a 2nd home. We have it fully furnished, livable, and go there almost every wknd, and several weekdays (it fluctuates). Our insurance agent listed it as “primary” and usage by owner, then changed it to ” unoccupied” causing premium to Triple. Can’t we list it as “secondary” home instead of “unoccupied”? Wouldn’t this make a big price difference? What justifies an occupied?

    1. Hi Lacy:

      It sounds like your insurance agent made a mistake in the first place, because it’s not intended to be a primary, but it’s also not unoccupied. It’s definitely a second home with the usage patterns you’re describing. I would bring that up with your insurance agent, because it’s misclassified.

      Thanks,
      Kevin Graham

  6. All seems complicated. What if I purchased a second home as my primary residence but keep my 1st home? I stay in the 1st home a few days each week since I still work and don’t want to commute 3 hours each day. My husband is disabled and our 2nd home was purchased near my daughter to assist with his care while I’m at work.

    1. Hi Ann:

      This is a question best answered by one of our Home Loan Experts. You’re right that that situation is a bit complex and I want to make sure you get the right information. You can connect with a banker by filling out this form or calling (888) 728-4702. They’ll be able to help you better than I can.

      Thanks,
      Kevin Graham

  7. My husband and I co-own a house. We are in the process of separation.
    The plan is that he will stay in the house for another 9 months or so, for various reason.

    I will live in a rental until he moves out. At some time in-between, we’ll refinance the mortgage and change the title to my name only.

    My question is about the owner occupancy requirement: We’d like to get the home transfer finalized as soon as possible, which means that I wouldn’t be (re)-occupying the home within 60 days of closing (but my belongings are still there, and we will still be legally married). All of my addresses for banks, drivers license, voter registration, etc will remain at the house.

    Could you advise me whether the owner residency requirement is fulfilled?
    If needed, I could even stay in the house over-night for a few days a week.

    1. Hi Sally:

      That sounds like a complicated owner occupancy situation and I want to make sure you get the right information. It’s probably best to talk to one of our Home Loan Experts that will know the ins and outs. The best way to get in touch is to call 888-728-4702.

      Thanks,
      Kevin Graham

  8. I am in the military and purchased a home in Georgia while I was stationed there. I am now stationed in Florida and rent the home in Georgia. If I wish to refinance to lower my interest rate, do I have to identify it as an investment property? Thanks!

    Kevin M.

  9. I own a home with my wife (primary residence) in TN; however, I’m planning to move to GA for a job transfer and probably won’t sell home in TN until my daughter graduates from high school. If my wife and daughter are still living in TN home, Will the home I purchase in GA be considered my primary residence as well?

  10. Hello, my husband and I are looking to buy a house in Florida and we have found a house that is currently tenant occupied. We intend the house to be our primary residence but the realtor has informed us that we need to fulfill the lease contract until it expires. Would this affect our loan type (Conventional Loan)?
    Thanks,

    1. Hi Rita:

      I don’t think it affects your loan type, but there may be other issues involved if the tenant has to stay until the end of the term of the lease. I’m going to suggest you talk to one of our licensed mortgage bankers by filling out this form or calling 888-728-4702. Hope this helps!

      Thanks,
      Kevin Graham

  11. My questions are: can you buy investment property and convert it into primary residence, if so how, and would I have to wait for the current lease to expire?

    The reason I ask is because I am looking at houses to buy next year and the one I want the most is an investment property.

    1. Hi Josh:

      You can absolutely buy investment property and convert it to a primary residence. The way the previous owner chooses to use it has nothing to do with you.

      If you buy the property, the contract for lease would be between the previous owner and the current tenant. You’re not party to that contract, so any relief would be the responsibility of the previous owner. Hope this helps!

      Thanks,
      Kevin Graham

  12. I’m planning to buy a second home in Michigan for my daughter as she doesn’t qualify for a home if her own. She will be paying for mortgsge. I’ll be living in my primary home in Florida. How does this affect me?

    1. Hi Eliz:
      We can definitely help you look into this. If you send us an email at Michelle@quickenloans.com with your preferred contact number and the fact that you’re looking to buy in Michigan, I can have someone reach out to you. Otherwise, if you’d like to get started over the phone, you can call 800-251-9080. Thanks and have a great day!

      Thanks,
      Kevin

  13. I initiated a mortgage loan in California, but will most likely be moving before the 60 days of it closing and have rented out the condo, although I lived in the condo for the majority of the yea, can I still take the loan as primary residence?

    1. Hi Jon:

      I’m going to have someone reach out to get more information from you and make sure I’m understanding this correctly. I think what you saying is that you’ll be moving within 60 days after your property closes and you’ll be moving into the condo. If that’s the case, you can’t claim the house you’re buying now as your primary residence because you have to live there the majority of the year. That being said, I’m going to have someone reach out to you because I want to make sure I’m understanding you correctly and that you get the right information.

      Thanks,
      Kevin Graham

  14. i am married and i own our home. my spouse is wanting to get a house as first time home buyer. it would not be primary residence for my spouse but is first time home buyer.
    what box do you mark: primary or secondary

    1. Hi Lisa:

      If it’s not a primary property where they will be living the majority of the time, your spouse has to mark secondary. The problem they may run into is that most of the incentives for first-time home buyers are based around primary residences. However, I hope this helps at least answer your question.

      Thanks,
      Kevin Graham

  15. Currently I am living in NY and renting a apartment. I would like to move to Dallas, TX next year and I want to buy home now. I won’t be qualified for Primary Residence since my workplace is in NYC. What could be the loan process scenario, tax if I sell it in future and homestead tax? I appreciate for your comment.

    1. Hi Santosh:

      I will admit I’m not too familiar with the loan process if you’re trying to buy a place where you’ll eventually be living that’s out of state compared with your current location. I’m going to get you to one of our Home Loan Experts who will be able to give you more information on that. They may or may not be able to help you with the homestead tax question, but I would recommend talking to a tax adviser to get the best advice for your situation. Someone will be in contact with you about this.

      Thanks,
      Kevin

  16. I currently own a small 1 bdrm beach condo as a second home and another small one is going on the market a couple of doors down. We’d like the buy this one as well so our families and kids can use that one when we’re all at the beach together. Is there a limit on how many second homes you can have?

    1. Hey Randy:

      The issues here get a bit complicated because of occupancy requirements. I’m going to have one of our Home Loan Experts reach out about this.

      Thanks,
      Kevin Graham

  17. Here is an interesting twist for you to solve 🙂 Would appreciate your response! I bought a house and lived there as primary residence for couple of years. Then I put it for rent for two years. Now I am going to move into one of the rooms while still renting out other rooms to existing tenants. One of the reasons I was considering this move was because I was hoping that I could reapply for refinancing at a lower rate if it is still my primary residence. Would the banks still give me a favorable rate in such a case or they would apply the harder assessment and higher rate that you mention above on rental property owners?

    1. Hi Krish:

      That is an interesting twist and just a little bit too complicated for me to give you a definitive answer, but I’m going to get this to a Home Loan Expert who should be able to help you out. They’ll be in contact.

      Thanks,
      Kevin Graham

      1. Hello I am interested to find out what the answer to this is. I am thinking about doing almost the exact same scenario but for different reasons. I am trying to find out what the best option will be for tax purposes.

        Thanks!

        Lauren

        1. Hi Lauren:

          Most lenders would probably consider this an investment property since you collect rent on it. However, for tax purposes, I’m not sure how the IRS would look at it. That might be a question best left to a tax preparer.

          Thanks,
          Kevin Graham

  18. We are a Military Family looking to retire in the next 10 years. My in-laws have land that they are building a small home on. It will more of a retreat-getaway home. We are wanting to purchase the property now so we can help our in-laws have a better retirement. They will not pay anything to use the home.
    We have no other home loans and we have great credit.
    As, far as us we will visit as much as we can. But, our in-laws will be using it allot.
    What type of loan would this be? Rural property no city taxes We plan on making it our full time residence after retirement.

    1. Hi Cindy:

      It sounds like at this point a vacation home loan, but I’m going to pass this along to someone that can help you look into your options.

      Thanks,
      Kevin Graham

  19. I currently rent a home and am looking to buy a vacation home in another state within driving distance. It will not be considered my primary residence, nor will it be a investment property. The homes I’m looking at are under 100k. What is my best course of action? I will be having a co/signer on loan. I got a lot if resistance from my local credit union on what constitutes a primary and secondary residence? As well as what is considered a actual home as opposed to property with a shed on it… Thank you for your time.

    1. Hi Michael:

      In terms of what constitutes a primary or secondary residence, it depends on how much time you spend there as well as the distance from your primary home, but other factors may come into play as well. It’s difficult to answer your property questions without knowing more about the specific details. That’s something one of our Home Loan Experts can take a deeper dive with you on. I’m going to have one of them reach out to help with your questions.

      Thanks,
      Kevin Graham

  20. Thanks for the information! Sort of a related question – I had rented my home out starting in May (May 2014). My tenants moved out in November (2015) and I’ve finally fixed the place up and have decided to sell it instead of renting it again. According to the 2 of 5 rule (where you need to have lived in a residence for 2 out of 5 years in order to forego paying added taxes after selling an investment property), I basically have two more months before this occurs, even though my tenants have left and it’s vacant? If it doesn’t sell by the start of May I’d have to make it my primary residence again to forego paying those taxes?

    Thanks.

    1. Hi John:

      I’m not familiar with that particular income tax rule. I can forward your question to one of our Home Loan Experts and see if they are familiar with the rules surrounding this, but you may have to talk to a tax adviser in your area to get a definitive answer.

      Thanks,
      Kevin Graham

  21. What if you purchase a second home as a primary residence and rent out your first home? Can you ever move back into your first home and then rent the second home (after a year or two)?

    1. Hi Liz:

      I suspect you would have to refinance to get back to the original property classifications and get the correct rates for each type of property, but I’m going to get this question to a home loan expert to give you a more definitive answer.

      Thanks,
      Kevin Graham

    1. Hi Nell:

      I’m going to get you to one of our Home Loan Experts. The definition may vary depending on the mortgage company, but I have someone give you a general idea.

      Thanks,
      Kevin Graham

  22. What if you own a home but want to purchase a different one to be your primary residence and then sell your cuurent home. Would your new purchase qualify as your primary residence?

    1. Excellent question, Susan! If you’re looking to buy a new home, your new home would count as your primary residence if you planned to sell the old one. Thanks for reaching out!

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