Vacation Home vs. Investment Property: What’s the Difference?

There are plenty of great reasons to buy a second home: a place to escape with family, a future retirement spot, or a way to build long-term equity. And with platforms like Airbnb and Vrbo, many buyers are eyeing second homes not just for relaxation, but for generating income too.

That’s where things can get a little tricky.

If you plan to rent out your second home, is it still considered a vacation home — or is it now an investment property? The answer matters, especially when it comes to mortgage rates, loan terms, and even your taxes.

Let’s break it down.

What Is a Vacation Home?

A vacation home — sometimes called a second home — is a property you plan to use for personal enjoyment during part of the year. It might double as a short-term rental when you’re not using it, but it’s primarily for your own use.

Vacation Home Requirements*

To be considered a vacation home, most lenders require that:

• You occupy the home for part of the year (it cannot be rented out full-time).

• You do not use potential rental income to qualify for the loan.

• The property is a one-unit dwelling that’s livable year-round.

• You maintain exclusive control (not a timeshare or managed by a third party).

• It’s located a reasonable distance from your primary residence.

Tip: Lenders may limit how many days per year you can rent the home. Be sure to review all conditions before applying.

Vacation Home Tax Rules**

If you rent out your vacation home for more than 14 days per year, the IRS considers that rental income taxable. However, you may still deduct some expenses — like mortgage interest or property taxes — if:

• You use the home for 14 days or more, or

• At least 10% of the total days you rent it out — whichever is greater.

Bottom line: If you enjoy the home yourself and rent it only occasionally, it may still be considered a vacation home for tax and mortgage purposes.

Mortgage Requirements for Vacation Homes*

To qualify for a mortgage on a second home, you’ll typically need:

• At least 2 months of cash reserves

• Minimum 10% down payment

• Credit score of 640 or higher

• Debt-to-income (DTI) ratio of 45% or less

What Is an Investment Property?

An investment property is purchased with the primary intent of generating income — whether from long-term tenants or short-term vacation rentals.

Investment Property Requirements*

Because these properties are considered higher-risk, the lending criteria are stricter. You may need:

• At least 6 months of cash reserves

• Minimum 20% down payment

• Credit score of 640 or higher

• Debt-to-income (DTI) ratio of 45% or less

One benefit? You can use projected rental income to help qualify for your loan.

Investment Property Tax Rules**

All rental income is considered taxable. However, you generally have fewer restrictions when it comes to deducting expenses, including:

• Repairs and maintenance

• Property management fees

• Advertising costs

• Mortgage interest and property taxes

  
  

So, Which One’s Right for You?

Whether you’re looking for a family getaway or your next income opportunity, it’s important to understand how your intent — and usage — affects how your lender and the IRS will classify the property.

Don’t forget: You’ll be responsible for two mortgages, two tax bills, two sets of utilities, and maintenance — year-round.

But if your finances allow, a second property can be both a rewarding investment and a fun way to build your future.

Disclaimer: Loan guidelines refer to conventional loans backed by Fannie Mae and Freddie Mac. Terms may vary by lender or loan type. Always consult with your mortgage professional for personalized advice. We are not a tax advisory firm. Please consult your tax advisor or the IRS for rules and regulations related to vacation and rental property income. Source: https://www.vibrantlivingnewsletter.com/single-post/vacation-home-vs-investment-property-what-s-the-difference