Drawbacks to classifying a loan as a 2nd home vs invest. property

2 Replies

I appreciate some advice here.  We are attempting to making our first purchase of a rental out of state where are kids are attending college.  Attempting a college house hack. ($10K savings yearly vs living on campus) The lender recommended we purchase it as a second home instead of an investment property to obtain a better interest rate. We are putting 20% down to avoid mortgage insurance. I have asked both my realtor and the lender and neither felt comfortable answering with all the changes in tax code in 2018.

My questions are tax related.  

1. Will we still be able to depreciate it on our taxes if it is purchased as a 2nd home instead of an investment property?  

2. Will we be able to rent it out to other kids besides our own after 2 years?

3. Is there anything you can think of that we might run into with this that would limit it as an investment?

You're asking the right kind of questions.

My understanding of the Tax Reform act is that the interest deduction limitation is $750k for a first + second home.

With that said, it may be advantageous to purchase the property as a second home, then place it in service as an investment to capture the advantage of a lower rate and deductibility.

The catch is that you'll have to keep the property in your name vs. holding title in the name of an entity.

Thanks for the reply Doug.  

One of my concerns is depreciating the asset.  That could be more advantageous than the percentage I might gain in classifying it as a second home. Also, I have the insurance issue to contest with it being designated appropriately.  

I am assuming you are referring to it not being held as an LLC if it is a second home. It would have to be under my personal name?