Tax Advantage - Primary/Owner Occupied vs. Investment Properties

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.



I was able to find some posts on this site about this subject, any further comments appreciated. TIA

That question is usually best answered by your CPA because there are many factors. Which way you go depends on how long you’re going to hold the property, how much the home will sell for, how much value you’re going to add, and what you’re going to do with funds when you close.

If you live in a property, there’s an exemption for up to 250k (sales price, not net) for individuals and 500k for couples if you’ve lived there a few years.

For investors, there’s many options.

  1. You can do a self-directed IRA, which means you aren’t paying capital gains, but you need to follow the guidelines.
  2. You can do a 1031 exchange, but need to hold for 5 years and, again, follow the guidelines.
  3. Others just take the tax hit since capital gains are still the lowest in history.

I wouldn’t see a big advantage of one over the other because there’s too many factors. The main thing investors do is determine on each property what the best exit and tax strategies are before they make a final decision.

You need to factor in your basis and recapture depreciation when you sell, so that needs to be calculated as part of your decision-making process.

There are a lot of articles on asset protection and tax strategies on the site.