It might be confusing to differentiate between a second home versus investment property. That’s true especially if you’re thinking about occasionally renting out the property — using it regularly for vacation, for example, but also making it available on Airbnb for some of the time you’re not using the property.

Earning some money from your property doesn’t automatically make it an investment, however. Accurately defining the piece of property depends on how much time you spend in it.

Elliot Pepper, co-founder, CFP and director of tax at Northbrook Financial in Baltimore, says that you need to pay attention to what he calls “the 14-day limit rule.”

“Very broadly speaking, if you personally live in your second home for 14 days or fewer — or less than 10 percent of the days it is rented — during a year, then it would be considered a rental property and the income earned would be taxable,” Pepper says. “But you would also deduct the expenses associated with the property.”

On the flip side, if you use the property for more than 14 days or more than 10 percent of the time it’s rented, any rental income you receive isn’t taxable, but you also can’t deduct expenses, Pepper says.

Lender requirements for second homes vs. investment properties

Making the distinction between a second home and investment property is important not only for tax purposes but also when you seek financing for the home.

Julienne Joseph, senior advisor for Homeownership, Office of the U.S. Department of Housing and Urban Development Secretary, says that credit score and loan-to-value ratio (LTV) requirements vary based on what the buyer plans to do with a property.

“Investment properties typically have more stringent underwriting guidelines than second homes and primary residences because there is an assumed [greater] risk of default on properties that borrowers don’t occupy,” says Joseph.

Put another way, if a borrower has trouble making mortgage payments, they’re more likely to keep up with the payments on their primary residence, which they live in more often, than payments for a second home — a riskier prospect for lenders.

The stricter standards for an investment property might also include a larger down payment requirement.

For instance, Navy Federal Credit Union requires a 15 percent down payment for an investment property, but if you’re looking at a second home, the down payment could be as low as 5 percent.

That’s a huge difference: For a home with a sale price of $500,000, second-home buyers might be able to put down just $25,000 (or 5 percent), while investment property owners would need to come up with $75,000 (or 15 percent).

Tax implications for second homes vs. investment properties

Homeowners enjoy the ability to deduct mortgage interest, but Pepper points out that this can get a bit tricky if you own a second home, due to the $750,000 total debt limit for interest deductions. Essentially, if you have more than $750,000 in mortgage debt between the two (or more) properties, you’ve maxed out the amount you can use to deduct interest.

However, “interest on a mortgage related to an investment property is fully deductible on [Form 1040] Schedule E for a taxpayer and can therefore be used to offset any income generated from the property,” says Pepper.

Investment property owners can use depreciation to their advantage, as well.

“For a personal residence, the owner is not allowed to deduct the actual cost of the home for tax purposes,” says Pepper. “However, for an investment property, the taxpayer will be allowed to take a deduction every year for depreciation. This deduction is based on the price of the house purchased and will be used to offset any income from the property.”

Pepper notes that this deduction isn’t a permanent write-off, “as the amount of depreciation taken will reduce the basis in the house. When the taxpayer goes to sell, they may end up with a larger tax gain that year.” This gain, known as depreciation recapture, is taxed at higher rates than traditional long-term capital gains.

In addition, whenever the selling year arrives, an investment property owner can be subject to income tax if the sale results in a profit, Pepper says.

For more on the tax implications of second homes and investment properties so that you can calculate your eligibility for tax deductions, review IRS Publication 936 and Publication 527.

Mortgage rates for second homes vs. investment properties

As they have with primary residences, mortgage rates for second homes and investment properties have increased in recent months. You’ll also pay higher rates, in general, for investment properties and second homes than you will for a primary mortgage loan. That’s because second homes and investment properties are considered riskier prospects for lenders.

Can you call an investment property a second home?

Tempted to call your investment property a second home and take advantage of some of the second-home perks, like a lower down payment and interest rate?

Don’t be. In the mortgage world, you need to call it what it is — whatever “it” might be.

“It is absolutely imperative that borrowers are completely transparent when disclosing to their lender the intended use of the property to ensure that they receive the appropriate product and rate,” says Joseph.

Joseph adds that borrowers might be asked to sign a document verifying their intended use of the property, so they’ll have to indicate in writing what they plan to do with the home. Deceiving a lender otherwise could have serious consequences.

“Intentionally misleading a lender constitutes mortgage fraud,” says Joseph. “Not only is it unethical – it’s illegal and could result in criminal prosecution.”

Bottom line

Make sure you understand both lender requirements and tax implications before purchasing a property you intend to both use as a second home and rental. When in doubt, consult a real estate agent or broker and an attorney or CPA to learn what rules might apply to your individual situation.