Avoiding 20% Down on Second Home

Currently live in my Primary Residence in suburb of Atlanta, GA. I'm interested in buying a lake property in N GA Mountains. In order to not put 20% down and keep more cash for rental down payments/repairs, is the possible scenario possible and above the board?

Buy Lakehouse with 3-5% down as it is intended to by Primary Residence. Switch licenses, billing addresses, etc to new Lakehouse Address while changing insurance on primary residence to make it a "second home".

In addition to saving on down payment percentage: It seems like if I "lived" in Lake House for 2 years, and moved back to current house for additional years before selling, I could sell either without paying taxes on gains.

What am I missing? How does the IRS officially determine where you live percentage wise when you have two homes within close proximity to each other? Before I consult a local Attorney/CPA, what are the legal and tax concerns with this type of planning?

Any help is greatly appreciated.

Joel Owens

Commercial Real Estate Broker · Canton, Georgia

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Jan 22, 10:09 AM

This is definitely a question for your tax advisor. There are many grey areas in the tax code and people take risks everyday to challenge the grey areas.

Some win and some lose. If you disagree with an IRS ruling with your case on a grey area then you might have to fight it out in court.

Another issue is loan fraud.If you state getting a loan that you plan to occupy the property and sign documents at closing and the lender feels you violated this agreement they can come after you.The whole point of the 20% down for investment is research shows that when times are hard the owner will dump the investment property first and protect the primary where they live.

Lenders know this and with 20% down even with foreclosure they can recover most of their money.When you live there versus a renter in many cases you will keep up the property better.

You also mentioned a license.Are you talking a real estate license or a drivers license??

If a real estate license and you are a REALTOR then not only do you have to see what is lawful but also what is ethical as well.Many activities are not unlawful but can be seen as unethical. No legal advice

Aaron Taulbee

Duplex Investor · Marietta, Georgia

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Jan 22, 11:00 AM

I had meant Driver's License. I figure between bills, address on your driver's license, and the address your W-2 is mailed to; those should account for where you live in the IRS's eyes. I realize this is gray; and in general I like to put 20% down or more, as I was able to do on primary. This would be a property that does not cash flow, but would have instant equity based on purchase price.

J Scott

Real Estate Investor · Atlanta, Georgia

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Jan 22, 12:48 PM

Lenders don't care where you get your bills, W2s, etc. They care where you live, for the reason Joel pointed out. If you don't plan to actually live there the bulk of the time, it's loan fraud.

J Scott, Lish Properties, LLC
Telephone: 770-906-6358
Website: http://www.123flip.com
http://www.123flip.com

Steven Hamilton II

Accountant · Lake Villa, Illinois

520 posts
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Jan 22, 01:39 PM

Aaron,

The IRS is very good at these types of audits. The will question based upon you owning both homes and that one is not rented out, they will put it up to you to prove that you spent more time at the home closer to work. You are approaching fraudulent territory with that topic. Pay your fair share and follow the rules. If you are going to move, then actually move. If you have children, they would have to change schools as well depending upon the district. Many lenders require a "second home" to be at least a certain distance from your primary residence.

I went through an audit with a client on this topic 2 months ago. It didn't go well for them and yes they changed all of their information. The auditor went as far as comparing mileage on their vehicles over the course of two years, school changes, distance from employment. They looked in depth for unreported income. The tax bill was not good. But the penalties were worse. The best representative in the world can't help when you're not being honest. By the way, the IRS watches the internet very well and internet posts don't go away.

-Steven the Tax Guy
Your guide to IRS laws, rules and regulations.

Aaron Taulbee

Duplex Investor · Marietta, Georgia

11 posts
50 influence

Jan 23, 04:37 AM

Thanks for the replies. This is what I had figured. Doesn't sound worth the risk to save some on front and back end. The lakehouse I was interested in turned out to be a turd when I went to look at it yesterday. I'll keep saving and do it the right way down the road.