Over the past couple of years, thousands of buyers from “up north” have purchased houses and condos in Florida with various ideas about how to use the property.
Some intend to relocate here full-time, some want to be seasonal residents until they eventually become full-time residents, and some want to own property they can offer visitors and snowbirds for short-term rental.
Property owners must have accurate information about the difference between second homes and investment properties.
Many potential buyers and new owners are asking for clarification on various occupancy categories, and the answer depends on whether you’re looking at mortgage lenders’ guidelines, IRS interpretation, or Condo/Homeowners Association rules.
– Mortgage lenders focus on risk management
– The IRS is concerned with taxation and deductibility of costs
– Condominiums and HOAs want to preserve property values by controlling non-owner occupancies
Mortgage lenders identify three separate levels of residential occupancy in their borrower qualifying standards: 1. primary residence; 2. second home; 3. investment property (non-owner occupied).
Within the same mortgage loan program (30-year fixed, for example) and for the same borrower, a primary residence mortgage will have a lower interest rate than a second home, and a second home will have a lower rate than an investment property.
When applying for a mortgage, buyers sign a statement declaring their intended property occupancy.
Lenders’ maximum Loan-To-Value ratios (LTVs) are higher for primary, lower for second homes, and lower still for investment properties. This means that a higher down payment is needed for second homes and investment properties. This is part of all lenders’ risk management.
A primary residence is defined similarly by most all interpretations. It refers to where a person lives for most of the calendar year, based on things like:
– Address on driver’s license and vehicle registration
– Utility usage
– Address on Federal income tax returns
– Voter registration
(The rumored “6 months and a day” standard for occupancy, residency and Homestead status is just that – a rumor. Occupancy and residency are determined and verified through valid documentation.)
When discussing second homes, things get a little blurry depending on whether you’re applying for a mortgage or filing tax returns.
IRS Publication 936 (Home Mortgage Interest Deduction), addresses how mortgage interest is treated on primary and second homes. Here is a direct link: Publication 936 (irs.gov).
IRS guidance explains that if a second home is not rented to others, it is automatically considered a “qualified home” for tax purposes, even if the owner doesn’t use it during a given calendar year. As such, any mortgage interest paid during the year on a qualified second home is tax deductible when itemizing deductions on personal income tax returns, the same as for a primary residence.
When a second home is rented to someone for part of the year, the IRS says the owner must live in the home for a certain period during that same year in order to deduct mortgage interest.
If an owner does not live in their second home for at least that period of time, the IRS calls it a rental property, which requires different tax accounting. See IRS Publication 527 (Residential Rental Property) for details. Here’s the direct link: Publication 527 (irs.gov).
Just because the IRS says something is OK for tax purposes, that doesn’t mean mortgage lenders look at things the same way regarding their risk management.
For this article, we use Federal National Mortgage Association, or “Fannie Mae,” guidelines, which are considered the benchmark for conventional (non-government insured) mortgage qualifying standards.
Government-insured mortgage financing (FHA, VA, USDA) is only for primary residences. Second homes and investment properties are not eligible for FHA, VA, or USDA mortgage financing programs.
Fannie Mae’s current second-home guidelines include:
– Reasonable distance from primary residence
– Occupied by a borrower some portion of the year
– Single-family home or individual condominium unit
– Suitable for year-round occupancy
– Borrower has exclusive control over occupancy (no third party approving or declining rentals and tenants)
– No rentals for a certain period after purchase
Under either IRS or lender guidelines, if a property’s use doesn’t conform to all second-home guidelines and requirements, it defaults to investment property status, which is property purchased with the intent of producing cash flow and/or price appreciation.
Remember, loans for investment properties carry higher interest rates and require higher down payments than loans for second homes, and second-home mortgages have higher interest rates and down payments than those for primary residences.
For years, occupancy misrepresentation to receive better rates and terms has been one of the most committed types of mortgage fraud in Florida.
Another major difference between primary, second home, and investment properties comes into play with properties governed by condominium and homeowners associations.
Many HOAs limit investment occupancies. When there are too many investment properties in a building or community (think short-term rentals), lenders are unlikely to approve purchase financing for individual properties in it. Study your Association’s Governing Documents for details and restrictions related to owner, guest, and tenant occupancies.
Remember that for all of the occupancies mentioned in this article, non-immediate family and friends/guests/acquaintances are not owner occupancy if the property owner is not there simultaneously.
There is still another major occupancy issue for buyers to consider – Florida’s very attractive Homestead protection for permanent residents.
Depending on how long owners themselves plan to live here each year, they may qualify for Homestead status on their Florida properties. Those who have already established Homesteads and rent out their properties for too long or too frequently (treating it like a second home or investment property) can be considered abandoning their Homesteads, losing the benefits that go along with it.
Whether you are a potential buyer or a current owner of a Florida house or condo, it is very important to understand the various rules that apply to the use and occupancy of your property.
This report was first published in The Florida Real Estate Blog by Chris Carter, a real estate Broker Associate and former Key Biscayne resident. For more, visit thefloridarealestateblog.com
