I purchased a property in AZ (as a 2nd home) which I will rent out. I recently heard that if you rent your home for >14 days per year it is considered an investment property.
I’m just wondering at what point a 2nd home is considered an investment property by the IRS? Thank you.
backwards, sort of.
If you use it personally for MORE than 14 days (or >10% of total days it was rented) then it will be considered a home, and your rental expenses will be limited.
so, if you use it for less than 14 days, it can be considered a rental property. well, assuming that it is actually rented, or held out (advertised) for rental, etc.
never showing revenue on your “rental” property would probably generate “questions.”
So if I never live in it and just rent it out, even though my morgage is for a 2nd home, this property is considered investment property and I can depreciate it, 1031 exchange it in the future and receive all the tax benefits of owning rental property?
Thanks so much!
If you rent out your second home less than 14 days per year, your property remains a second home and your rental income is tax free. You can not deduct any costs of rental operation and you cannot take a depreciation expense.
If you rent out your second home out for more than 14 days per year, then you no longer have a second home. You have a mixed-used property. You have to allocate your costs between rental and personal use, then you are only allowed to deduct your rental costs against rental income.
If your periods of personal use are less than 14 days per year and the rest is rental use, then your property is an investment property. All the tax benefits of investment property are available to you.
As an aside, if you obtained a loan for a second home and immediately put the property into service as a full time rental, your lender may question whether loan fraud is in play.