Purchasing home as a residence or investment?

Question

I currently have a two unit property under contract, initially it looked as if it was going to be classed as an investment property with 15% down. Our lender has now informed us that since it is multi unit it will need to be 25%, or I can purchase it as my first primary residence. This may work as one unit won't be rentable for a year and I can occupy it. That said I can also afford the bump up to 25% down. Are there tax incentives that should tilt my choice in a specific direction?

Richard Sherman · Answer

@Ryan Heywood Make sure you ask about occupancy requirement (how fast you need to move in.)  In general, a primary residence loan is going to have better terms (lower down payment, lower interest rate etc) than an investment.   Make sure you check if you have to pay PMI if you put down 15%, see if paying 20% makes PMI goes away.

Ryan Heywood · Answer

There would be PMI, my lender quoted me $33 a month and both of us were surprised at how low it was. How about deductions, will occupying the property alter what I can claim?

Richard Sherman · Answer

@Ryan Heywood it is pretty low but still run the math on if that $33 per month is worth having the 5% to use for something else.  Might be might not just depends.

My understanding (I am NOT a CPA so double check this) is that you would get proportional deductions for the space that is rented as well as depreciation, but the portion that is your residence would be like a standard residence, i.e. no deductions for depreciation or updates, but proportional exclusion from capital gains.  I would imagine interest deductions would be the same.  Hopefully a CPA can weigh in on that though.