The type of property you’re purchasing affects both your interest rate and your eligibility for a mortgage interest deduction. There are three ways the property you’re purchasing can be classified: a primary residence, a second home or an investment property.

Primary Residence

Primary residences qualify for the lowest mortgage rates. In order for a home to qualify as your primary residence, these are some of the characteristics that must be met:

• You must live there a majority of the year.
• It must be a convenient distance from your place of employment.
• You need documentation to prove your residence. You can use your voter registration, your tax return, etc.

If you plan on turning the property into an investment property within six months of closing, it must be classified this way. This could happen if you plan on having a tenant rent the property.

In addition to these criteria, the property must be occupied by the buyer within 60 days following closing. If the loan in question is originated through the VA and you’re on active duty, your spouse can satisfy the occupancy requirement.

Mortgage interest on your primary residence is deductible. If you took out your mortgage after 2006, you can also claim your mortgage insurance payments as part of the interest and deduct them.

Second Home

When purchasing a second home, you may need a higher credit score to qualify, and you might receive a higher interest rate due to increased risk for the lender. On the other hand, it may be that neither of these things happen – each situation is different. A second home has the following characteristics:

• It must be a reasonable distance from your primary residence.
• It must be exclusively under your control and not subject to a rental, timeshare or property management agreement.
• You must live there at some time during the year. While someone else can live in your home other than yourself, some lenders may place limits on how long the home is occupied without you living there.
• The property must be accessible by car year-round. Although it’s cool, your Dr. Evil-style lair that’s built into the side of a volcano and reachable only by helicopter won’t qualify as a second home.

For tax purposes, a second home may qualify for the mortgage interest deduction. You can even rent it out, provided that you live in the home for more than 14 days or more than 10% of the days in which you would normally make it available for rental ­– whichever is greater.

For example, if you rented out your home in Florida for six months between May and October (inclusive), you would still be able to classify your home as a second home for tax purposes if you stay there more than 18 days. (For convenience sake, I’m assuming six months is 180 days.) A timeshare used in this way also qualifies as a second home.

Investment Property

If you plan on using your property exclusively for tenant rental, it must be classified as an investment property. The loans on these properties are made at a higher interest rate and require a higher credit score.

There are a few special requirements for investment property loans:

• You may have to show a lease agreement that confirms the property is occupied by a tenant.
• If the lease agreement gives the tenant the right to purchase the property, it must be secondary to the mortgage.
• If the lease has expired and the tenants are now paying month to month, you have to provide a letter to that effect.

Although this gets a little complex, mortgage interest is one of several rental expenses you can deduct on your taxes. If you use the home for both rental and personal use, you must divide out the space for the purposes of expense determination. You can deduct as rental expenses any tenant room(s) and a part of the shared space that’s proportional to how much of the house is being rented out. Two common methods to base this on are the number of rooms in your home or the square footage.

To clarify this a little bit, let’s take my house as an example. I live in an 1800 square-foot ranch with eight rooms. If we were to rent out a 15 x 15 bedroom (225 square feet), you would deduct that plus 12.5% of any shared space. (225 is 12.5% of 1800.)

To save any more complex math, let’s say I rented just the bedroom with no access to elsewhere in the house and I wanted to deduct part of the mortgage interest as a rental expense. If the annual private mortgage insurance payment is $800, you can deduct $100 (12.5% of $800).

Hopefully this has helped you understand a little bit more about property classification and home mortgages.

Posted by:  Carlson Mortgage – a St. Louis mortgage broker providing home loans in the state of Missouri.  We can be reached at (314) 329-7314 seven days a week. Let us be your source for some of the lowest mortgage interest rates in St. Louis on conventional, FHA, Veterans (VA), USDA, Jumbo and condominium (condo) financing. We have 11 years of experience providing home loans and mortgage services in St. Louis that are tailored individually to your unique needs and to your financial situation. We speak English, Spanish and Russian. Call us today to inquire about home loan interest rates. to get pre-approved for a purchase or a refinance mortgage, or if you have any general mortgage questions. 

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