The Tax Benefits of Owning Property as a Primary Residence and Investment

Posted on 24th May 2016

Many homeowners who bought properties both as a primary residence and for investment purposes lost their homes to foreclosure during the recent subprime mortgage crisis. Nonetheless, that should not deter those who are interested in this shrewd investment strategy, as long as they are willing to learn the lessons from the crisis and pursue more effective strategies.  Purchasing real estate as a primary residence and an investment property requires careful planning, because there are risks; however, there are great benefits for those who do it correctly in terms of both income and tax benefits. 

First, prospective owners must be sure that they can afford the house they want to buy. They should have an excellent credit rating so that lenders offer them the best mortgage interest rates, and their mortgage should be at a fixed rate. Owning this type of property requires the purchase of a parcel that has at least two units. Presuming the owners are a married couple, they reside in one unit and rent out the other(s). The owners are responsible for expenses such as any mortgages on the property, taxes, insurance, water and sewer, heating costs and general upkeep.

The investment goal is to have the tenant(s) cover as much of the costs as possible, so that the owners can limit disbursements from their personal funds. As the property is both a residence and an income-generating property, the owners can deduct the expenses on their federal tax return that relate to basic operations, including maintenance of the rental unit(s).  This is important, because owners of properties that are used as a primary residence can deduct mortgage interest and taxes, but they usually can't deduct the insurance, water and sewer, heating and home maintenance expenses.

The risk here is that good tenants who pay on time and who don't damage the property might be hard to find, so owners must have money for legal fees in case they must evict non-paying tenants. Moreover, when a tenant moves out, it might take time to get the unit ready for a new tenant to move in. Prospective owners must be sure that they have enough money to afford not just the down payment on the property, but that they can afford all the expenses on their own.

As a cautionary note, if the property is an apartment building in New York City and it has six or more units, the owners run the risk of the property being rent stabilized. Rent stabilization prevents owners from renting at a market rate. Instead, local planning authorities determine the increase in rent an owner might charge in any one year. Owning real estate for residential and investment purposes is ideal for owners who live in class one properties: one, two, and three family homes.  They can charge market rents that coincide with rising inflation.