So, you’re thinking about finally investing in that beach house up for sale in your favorite resort town. But will it be your vacation home? Or will you use it as a rental property?

Maybe you’re planning on doing a little of both. Either way, purchasing a property can always be seen as a good long-term investment, whether you plan on generating rental income or not. However, mortgage lenders and the IRS will define your home as either a personal residence or investment property.

Angie Gray, TowneBank Mortgage loan officer, and Heather Sakers, real estate agent with Coldwell Banker, can help explain the differences between vacation homes and investment properties.

Vacation Homes

A vacation home, or second home, is a residence that you plan to occupy for part of the year. It’s typically used as a vacation home, but could also be used as a property that you visit on a regular occasion—such as an apartment in a city you visit frequently for work. Typically, vacation homes must be located a certain distance from your home, or in a resort area, such as the Outer Banks.

“A second home is a reasonable distance from your primary home. You must occupy the home some portion of the year and you cannot typically own another home in the same area,” says Heather.

Borrowers who want to purchase a vacation home must have enough income to qualify for monthly payments and will need a down payment of at least 10% for loans up to $424,100. For loans on vacation homes over $424,100, the borrower must put at least 20% down.

To qualify for a second home, a borrower must ensure that the home will be occupied only as a second home and that the property will be kept available for the borrower’s exclusive use and enjoyment. This means that the borrower cannot use the home solely as a time-share or rental home.

“On the lending side, we ensure someone purchasing a second home intends to occupy and control the home. Also, even if there is seasonal rental income on the home, we would not use any rental income for qualifying,” says Angie.

This doesn’t mean you can’t rent out your vacation home on occasion. “A big misconception is that a second home cannot have rental income. Most investors are ok with seasonal income on a second home/vacation home. They do, however, want to see that the buyer can occupy the home for personal use when they please,” says Angie.

Your vacation home is considered a dwelling unit if you use it for personal purposes for 14 days during a taxable year, or use it 10 percent of the total days you rent it out to others.

For instance, if you occupy your vacation home for 20 days throughout the year, it is still considered as a vacation home—unless you rent it out more than 200 days throughout the taxable year. You should consult your tax advisor for more details.

In fact, borrowers may rent out their vacation home 14 days throughout the taxable year without reporting any income to the IRS. You cannot deduct expenses associated with renting the property, but can still deduct mortgage interest, real estate taxes and casualty and theft losses, according to the IRS.

“Locally property management companies allow homeowners to be absentee owners but still have full control to use the property whenever they want for however long they would like,” says Heather. The property management company can help you keep track of rental usage and report it to the IRS.

Investment/Rental Homes

An investment property is not your primary residence, and it is purchased in order to generate income, profit from appreciation, or to take advantage of certain tax benefits.

“An investment property is a true investment, purely for rental income or for clients who own multiple homes in the same area,” says Angie.

Borrowers purchasing an investment home under $424,100 can put as little as 15 % down. Those purchasing an investment home over $424,100 must put at least 25 % towards the down payment. Under some circumstances, projected rental income can be used to help qualify the borrower for an investment property, says Angie.

“The biggest difference in qualifying for an investment property and vacation home is that the reserve assets needed on an investment property is greater, and we do not use the rental income for qualifying for a second home,” Angie says.

Rental properties allow for personal use, but it is limited to no more than 14 days or 10 % of the number of days its rented out.

All rental income must be reported to the IRS. You can write off expenses from your rental homes, such as mortgage interest, property tax, operating expenses, depreciation, and repairs. You must, however, pay taxes on the profit that you earn on the rental property after expenses, according to the IRS.

Angie Gray is a Loan Officer with TowneBank Mortgage(NMLS ID # 512138) in the Outer Banks of North Carolina. She can be reached at 252-255-4557 or via email at [email protected]. (NMLS ID # 463398)

Heather Sakers is a real estate agent with Coldwell Banker Seaside Realty in the Outer Banks of North Carolina. She can be reached at 252-255-6474 or via email at [email protected]

* TowneBank Mortgage is not a tax consultant. Contact your tax advisor for more details.