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Can You Own 2 Primary Residences?

The type of property you want to purchase affects the mortgage interest rate you can receive. There are three potential classifications for the property: a primary residence, a secondary residence and an investment property.

Understanding each classification can help you avoid high-interest rates and tax implications when purchasing additional properties.  If you have recently purchased a second home or are looking into buying a second home, you'll need to know how owning to families impacts your taxes. Specifically, you'll want to know whether or not you can claim two primary residences on your taxes.

The short answer is that you cannot have two primary residences. You will need to figure out which of your homes will be considered your primary residence and file your taxes accordingly.

If you're thinking about buying a second home for vacations, rental income, or an eventual retirement residence, it makes financial sense to take advantage of all the available tax breaks. The cost of owning a second home can be significantly reduced through tax deductions on mortgage interest, property taxes, and rental expenses.

Whether you are looking at purchasing a second home for investment purposes, as a permanent vacation destination, or as housing for an aging parent or grandparent, owning more than one home presents its own set of unique challenges and concerns.

Some people own more than one home because they are waiting for housing prices to recover before putting their old residence on the market. Whatever your reasons, there is help in navigating these unknown waters. Just make sure you're covered with an affordable home insurance policy.

ATO AND PRIMARY RESIDENCE

There are a few different ways to figure if the home you're currently living in can be considered your primary residence. In order to determine which house should be regarded as your primary residence, you need to ask yourself the following questions:

  • Where do you receive the bulk of your mail?
  • What address is listed on your driver's license?
  • Which home is in closer proximity of your employer?
  • What lesson is listed on your tax returns?
  • Where are your cars registered?
  • Where does the bulk of your family members live?

After you have answered these questions, you should have a better idea of where your primary residence is. While the ATO does not allow you to have two primary homes for tax purposes, you may still be eligible for tax deductions when you own multiple homes.

How lenders define a primary residence

A primary residence is a place where you will most likely live and spend most of your time. Primary residence mortgages can be easier to qualify for than other occupancy types and can offer the lowest mortgage rates.

Lenders view them as properties because homeowners are more likely to stay on top of payments for the roofs over their heads.

For the property to qualify as a primary residence, the following criteria must be met:

  • You must live in the home for the majority of the year.
  • The home must be located within a reasonable distance from your place of employment.
  • You must begin living in the house within 60 days of closing.
  • If you refinance the mortgage for your primary home, you must be able to prove your residence through documentation (e.g., tax returns or government identification).

A principal residence is a primary location that a person inhabits, also referred to as a primary

home or principal place. It does not matter whether it is a house, apartment, trailer, or boat, as long as it is where an individual, couple, or family household lives most of the time.

Ownership of a property in and of itself does not mean it is a principal residence. Likewise, putting furniture and other personal effects in the dwelling does not necessarily qualify it as a principal residence. For tax purposes, the taxpayer must both use and lease or own the home for a minimum duration to meet some of the qualifications.

A primary residence is a leading home someone inhabits. Your direct property can be an apartment, a houseboat or another form of stuff that you live in most of the year.

Primary residences tend to qualify for the lowest mortgage rates. For your home to qualify as your primary property, here are some of the requirements:

  • You must live there most 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, tax return, etc.

There are some tax-deductible aspects of a primary residence. As of 2018, homeowners can deduct mortgage interest on loans up to $750,000. This amount can include primary and secondary residences. You can also claim your mortgage insurance payments if you purchased your home after 2006. If you choose to include these deductions on your tax return, you will have to itemize your deductions instead of claiming the standard deduction.

You can classify one property as your primary residence. If you're married, you and your spouse must claim the same property as your primary home.

Besides, once you've bought the property, you must occupy it within 60 days following closing. If the loan originates through the VA, and you're on active duty, your spouse can satisfy the occupancy requirement.

If you plan to turn the property into an investment or rental property within six months of closing, you must classify it as an investment property.

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How lenders define a second home

If you want to buy a vacation home, then your property will likely be classified as a second home. A second home classification depends on how you plan to occupy the property, not whether it is actually the second home you've ever bought or currently own.

Your property will be considered a second home if it meets these conditions:

  • You must live in the house for some part of the year.
  • The home cannot be subject to a rental, timeshare, or property management agreement.
  • The borrower must have exclusive control over the property.
  • The home must be a one-unit dwelling and must be suitable for year-round occupancy.

TIP: If you don't plan to live in this property full time, keep in mind that the home's location can affect whether it's considered a second home. If you choose a place too close to your primary residence, it may be classified as an investment property, which could mean higher mortgage rates and stricter qualifying requirements.

A second home is a residence that you intend to occupy in addition to a primary residence for part of the year. Typically, a second home is used as a vacation home, though it could also be a property that you regularly visit, such as a condo in a city where you frequently conduct business. Often, to qualify for a second-home loan, the property must be located in a resort or vacation area—like the mountains or near the ocean—or a certain distance from the borrower's primary residence.

Second-home loans regularly have a lower interest rate than investment property loans and will usually include a Second Home Rider along with the mortgage. This rider usually states that:

  • the borrower will occupy and only use the property as the borrower's second home
  • that the property will be kept available for the borrower's exclusive use and enjoyment at all times
  • the property cannot be subject to any time-sharing arrangement or rental pool, and
  • the property cannot be subject to any agreements that require the borrower to rent the property or give a management firm (or any other person) control over the occupancy and use of the property.

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. Lenders will review your financials and evaluate your loan-to-value ratio, or LTV. Depending on the lender's LTV ratio requirements, you may need to provide a large down payment.

On the other hand, neither of these things may happen – each situation is different. A second home must have the following characteristics:

  • You must live in the home some part of the year
  • It must be exclusively under your control and not subject to a rental, timeshare or property management agreement
  • Other restrictions apply

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.

You can rent it out for up to two weeks and keep the income tax-free. If you rent for 15 or more days, you'll have to report the income, but you may be able to deduct certain things, such as rental expenses. It's important to note that either your lender or the investor in your mortgage may place special limits on how often you rent the property.

The property may qualify as a second home if it's rented out for no more than 180 days in a calendar year. You must stay in the home for the larger part of the 180 days or for 10% of the days when you would otherwise rent out the home.

Second homes also qualify for the mortgage interest tax deduction, although if you're renting out the home, you have to be careful. In order to qualify for the deduction, you must use the home for more than 14 days or more than 10% of the days when you would normally rent it out, whichever is more outstanding.

 

Pros and Cons of Owning Two Residence

TAX DEDUCTIONS FOR MOVING EXPENSES

Moving expenses can be tax-deductible under the right circumstances. The ATO lists criteria related to when you start work, how far your new residence is from your job versus how far your old residence is from your job, and how long you have been employed since moving. We highly recommend speaking with a tax professional before buying a second home to fully understand how this impacts your eligibility to deduct moving expenses from your taxes.

TAX BENEFITS OF MULTIPLE RESIDENCES

While you may not be able to claim multiple primary residences for tax purposes, the ATO does give you tax deductions if you own multiple homes. As long as both families are being used for personal purposes, you can deduct the mortgage interest, home equity, loan interest, and insurance premium payments you pay on your second home. To maximize your tax deductions, you need to speak to a tax professional.

The Bottom Line

If it's financially feasible, owning a second home can be an excellent investment for vacation or rental purposes, and could also provide a suitable primary home during retirement. But because owning any home carries a significant financial burden, from mortgage and taxes to maintenance and repairs, it's in your best interest to learn the tax implications for you of second-home ownership.

It's not a good idea to misrepresent how you plan to live in or rent out your home on your loan application. You will not be the first person who has thought of ways to mislead lenders, and lenders will verify your property's occupancy during and after the underwriting process.

In the past, lenders would hire people to knock on doors to verify whether borrowers actually lived in the home. But these days lenders have more sophisticated and high-tech tools to verify occupancy. Lenders can use data analysis and algorithms to spot borrowers who may have lied on their mortgage applications. Data from credit bureau files, utility bills, and tax information can help determine whether your addresses are different than those used on loan applications.

If you're considering a purchase of additional properties, make sure it makes financial sense. Work with a tax professional and a lender to determine the best direction to pursue.

When you are purchasing a second home, it is crucial to remember that your homeowner's insurance, liability insurance, mortgage insurance, or landlord insurance needs will be different from those you are accustomed for your primary residence.

Knowledgeable, independent insurance agents are always available to answer your questions, suggest coverage options best suited for your second home needs and purposes, and even assist you in filing a claim. Owning a second home can be exciting, but the additional expenses and insurance needs can be confusing. You don't need to go it alone.

 

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