Tax Advantage - Primary/Owner Occupied vs. Investment Properties

[R19]

I have re-posted this under "Asset Protection, Legal and Contract Issues, Income Taxes, 1031 Exchanges" as this is a tax question.

Great site - doing research here and abroad...

There are many in high priced real estate markets that currently rent but have capital to place in real estate.  They could either bite the bullet and purchase something quite limited in their area or continue renting and invest in a property in a lower priced real estate market with much more attractive risk/reward.  The overall goal is to place capital in something building equity even though much of the market is bearish...

I am trying to learn about the general tax advantages to primary/owner occupied properties vs. investment properties.  This will help in the assessment of whether it is advantageous to invest in other states.  Many books I have read through in the book store hardly cover taxes and don't really outline the differences between the two types of real estate clearly.  In my mind it should be clear.

If anyone has any comments, much appreciated in advance.  Perhaps a condominium or small single family residence could be used as the example property.

[Dave T]

If you are considering the tax impacts only:

Owner occupied or second home:  

• Repairs and maintenance are personal expenses and not deductible
• Mortgage interest and property taxes are deductible, but only if itemizing deductions on Schedule A
• Hazard Insurance, flood insurance and PMI premiums are personal expenses and not deductible
• No depreciation expense allowed
• HOA fees or condo association dues are personal expenses and not deductible
• If rented no more than 14 days per year, rental income is tax free
• At sale, $250K in sale profit per taxpayer can be excluded from capital gains tax for primary residence only.
• At sale, if tax loss incurred, the loss is a personal expense and not deductible
• May qualify for homestead exemption on property taxes.

Used as investment rental:  

• Repairs and maintenance are deductible
• Mortgage interest and property taxes are deductible on Schedule E.  
• Hazard Insurance, flood insurance and PMI premiums are deductible
• Depreciation expense allowed
• HOA fees or condo association dues are deductible
• At sale, capital gains exclusion does not apply.
• At sale, if tax loss incurred, the loss is a capital loss and may be deductible
• Does not qualify for homestead exemption on property taxes.

[aak5454]

there are no "advantages" of paying taxes except to the taxation authority that collects them.

as for "investing in other states", all you need to know is taxation rates can vary widely from area to area.  Taxes on an investment prop. are just an expense to be paid just like anything else.


your agent/realtor should be able to advise you on the basics of local taxes (town, county ,city, etc) for a certain property.  As for Federal taxes, (for the most part) it does not matter whether its the house next door or 3000 miles away.

[R19]

thx $1M USD, Dave T and aak5454.  I highly appreciate the responses.