Owner Occupied vs. Investment Property: Greatest Tax Benefits?

By James Young on May 4, 2013
Owner Occupied vs Investment Property: Greatest Tax Benefits?!

The question of which will be more tax-advantageous for you comes down to this: it depends. I know, I know, that sounds like a cop-out. But the truth is, the tax advantages of any investment are largely dependent on the overall income of the property owner. While each approach offers some advantages, how ownership of either type of property will impact your bottom line is something you should discuss – and discuss carefully – with a financial advisor or tax professional. Here are a few – and just a few – of the tax implications to consider:

While you own the property

  • Owner occupants can deduct both property taxes and mortgage interest from their income, which can have a significant impact on the total tax you pay. (This is usually listed as the primary advantage of owner-occupied homeownership – and it is, indeed, a big advantage.)
  • Landlords are able to depreciate their rental property and certain items they provide with the property; in many cases, the depreciation they can deduct exceeds the home’s actual decline in value.
  • Investment properties can be part of a self-directed IRA (individual retirement account), which can help mitigate the tax burden of rental income.

When you sell the property

  • Another big advantage of owner-occupied housing: When you sell your home, you won’t pay any capital gains taxes on the sale price up to $250,000 if you’re single or $500,000 for couples filing jointly – that’s a huge windfall (this can change if you’ve deducted the use of the home as a business).
  • While not excluded from capital gains, investment properties that have been owned for more than a year or two usually are subject to lower capital gains taxes than other investments.
  • Landlords can defer gains on the sale of a home when they purchase another home within a limited time frame (this is referred to as an exchange).

Unless your name is followed by the initials CPA, this can all seem pretty confusing, which is why the opening paragraph of this piece recommended seeking answers specific to your situation from a reputable financial advisor. Whether you’ll derive a greater benefit from owner-occupied or investment property is entirely dependent on your individual circumstances.

Finally, here are a couple of other things to remember: An investment property is just that – an investment. No matter how many property-related shows you’ve watched on HGTV or TLC, you should approach an investment property purchase with the same emotional detachment you’d have if purchasing say, energy stocks, and make sure it fits your overall investing strategy and portfolio; any analysis should include multiple factors – not just taxes. Likewise when buying a home to live in, you need to look beyond the potential tax advantages and consider how it will suit your needs, both now and for the entire time you plan to live in it.

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About James Young

My name is James Young- I love red wine, sailing, and playing guitar. I believe that everyday is truly a gift. I'm blessed to live five minutes from the sand in the beautiful city of Long Beach, CA. When I'm not assisting homeowners, you'll find me belting melodies with friends around a campfire, wandering the halls of an art exhibit, or watching ESPN re-runs until the sun comes up. So what am I doing here, you might ask? In a couple of sentences- I'm passionate about empowering first-time and experienced home buyers to make their dreams a reality. Whether it's saving thousands on your home loan, buying your first home, or acquiring your first investment property, I'm always here to help. Don't hesitate to ask questions, and please remember to "share the love"! :) #loveloans #loverealestate #lovelife!