Purchase as Investment Property and make it Primary residence

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Purchase as Investment Property and make it Primary residence

Yos W.
Investor · New Kensington, PA · Member since 2013 · 17 posts · 0 votes

Tried searching but didn't come up...
we plan to buy a house for investment, but then think we make it our primary residence.(either immediately or wait 1-2 years)

I know that if it was the otherway around, it's against the law.. but how about my case? we applied for mortgage as investment, not primary and put down 25%.

Next would be: what if we rent it out for a year (and take full deductions on the cost associated with renting it out and depreciation), then after 1 year, move in and make it our primary residence? is this ok?
I know that if we do this, when we later sell after several years, those depreciation will be recaptured.. but how about the other costs I've deduct on the first year? does it need to be re-captured as well?

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y
    Originally posted by @Yos W.:

    Tried searching but didn't come up...
    we plan to buy a house for investment, but then think we make it our primary residence.(either immediately or wait 1-2 years)

    I know that if it was the otherway around, it's against the law.. but how about my case? we applied for mortgage as investment, not primary and put down 25%.

    Next would be: what if we rent it out for a year (and take full deductions on the cost associated with renting it out and depreciation), then after 1 year, move in and make it our primary residence? is this ok?
    I know that if we do this, when we later sell after several years, those depreciation will be recaptured.. but how about the other costs I've deduct on the first year? does it need to be re-captured as well?

     Hi Yos,

    Please take a look here. 

    If you intend to rent it out for the foreseeable future, buy it as an investment property. 

    If you intend to owner occupy it in the foreseeable future, buy it as a primary residence. 

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  • Yos W.
    OP
    Investor · New Kensington, PA · Member since 2013 · 17 posts · 0 votes
    9y

    Hi Chris,

    thanks for the link. 
    how does it considered to be a fraud? I mean, we plan to pay the mortgage and not going to run off with their money..
    plus, the reason for renting out first year is because our current residence is NOT ready to be put in market yet, we are still working on the kitchen and this will probably take 3-4 months as I'm a DIY-ers with fulltime job.

    I will definitely disclose this to our lender, so that they will be aware..

    this is our 2nd investment property.. umm.. well we liked it so  much we think of making it our primary now.. especially since the rental market is quite weak recently..

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  • Matt B.
    Investor · Bethlehem, PA · Member since 2016 · 229 posts · 122 votes
    9y

    its considered fraud because investment properties typically get charged higher interest rates. so if you got 4% on an owner occupied unit, that same property may be charged 4.5% or 5% as an investment property. Not to mention the bank has a stake in that property so if you deceive them with your intentions I'm sure they can seek some sort of recourse. 

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y
    Originally posted by @Yos W.:

    Hi Chris,

    thanks for the link. 
    how does it considered to be a fraud? I mean, we plan to pay the mortgage and not going to run off with their money..
    plus, the reason for renting out first year is because our current residence is NOT ready to be put in market yet, we are still working on the kitchen and this will probably take 3-4 months as I'm a DIY-ers with fulltime job.

    I will definitely disclose this to our lender, so that they will be aware..

    this is our 2nd investment property.. umm.. well we liked it so  much we think of making it our primary now.. especially since the rental market is quite weak recently..

     If you're going to rent it out for a year, you should be good to go. Fannie is mostly worried about the folks that can't qualify for a mortgage due to income, so they take the higher rate and make the larger down payment, call it an investment property so the rent can count as income, immediately move in... and *surprise* 3 months later they can no longer afford to make the payments. 

    This concern is sufficiently great that many lenders will not allow rental income from the property being purchased to "count," either at all, or unless a zillion hoops are jumped through. 

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Yos W.You're absolutely right.  If you move into (convert) a house you have owned as investment into your primary residence you will have to recapture depreciation.  But there's another little hidden gotcha.  You will also then not receive the full primary residence exemption when you sell.  You will have to prorate the gain between times of "qualified use" (primary residence) and "non-qualified use" (as investment).  

    You may think that's not a big deal.  and it's not if you hold the property for 10 years and live in it for 9.  You would get 9/10ths of the gain tax free.  But if you only owned it for a year and then moved in and sold in two more years you would only get 2/3rds of the gain tax free. 

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