Tax Benefits of Property Vs. Residential Investment

by Alexis Lawrence, studioD

The tax treatment of a house purchased for use as your primary residence differs from that of property purchased solely as an investment. Though a residential property has a more favorable overall tax rate than an investment property, an investment property does offer a couple of advantages that a residential property does not.

Advantages of a Primary Residence

When you complete you annual Form 1040 tax return for the IRS, you may declare several write-offs in regards to your primary residence. Line-item deductions for a residential property that you may list on your tax return include interest on the property’s mortgage, local property taxes paid on the residential property, any premiums paid for mortgage insurance and interest on a home equity credit line — as long as the total line of credit is under $100,000.

Buying Investment Properties

Purchasing an investment property does not offer all the same perks as a residential property, although you may write off the interest on one secondary property along with your primary residence. If you rent out an investment property, you may declare several deductions that you may not declare on your primary residence, including the cost of repairs, supplies, pest control and cleaning, as well as any management costs and utility expenses.

Selling a Residential Property

The tax treatment of a residential property versus an investment property is the most pronounced when you sell a property. When you sell a residential property, each person on the deed may make up to $250,000 profit on the sale of the home without having to declare that money to the IRS. This rule applies to a property that you have lived in for two out of the five years prior to the sale of the property. You may sell a primary residence that meets this qualification every two years without any penalty or taxation.

Selling Investment Properties

If you sell a property that you have not lived in for two out of the five years prior to the sale of the property, the property is treated as an investment property by the IRS. This means that you must pay capital gains taxes on profits from the sale. If you sell for $750,000 a property for which you paid $500,000, for example, you must report the $250,000 difference, minus any fees that you incurred during the sale, on the “Capital Gains” line of your tax return.

Why Investment Property?

Even with the less favorable taxation policy on profits, investment properties do offer some benefits. Since you do not need to live in an investment property, you may buy an empty building and sell it in the same tax year with no penalty aside from the 15 percent capital gains tax. You may also sell multiple investment properties each tax year with no required waiting period, as opposed to the mandatory two-year waiting period between the sales of residential properties.

About the Author

Alexis Lawrence is a freelance writer, filmmaker and photographer with extensive experience in digital video, book publishing and graphic design. An avid traveler, Lawrence has visited at least 10 cities on each inhabitable continent. She has attended several universities and holds a Bachelor of Science in English.

Photo Credits

  • Comstock/Comstock/Getty Images