Principal residence vs. investment property.
In plain English
A principal residence is where you actually live most of the year. An investment property is one you own to rent or resell. The same building gets different mortgage rates (investment loans run higher), different minimum down payments (often 15% to 25% for investment), different insurance, and different tax treatment: the capital gains exclusion on selling a home you lived in does not apply to a pure rental, while rentals get depreciation and expense deductions a residence doesn't.
01Why it matters
Misstating which one you're buying on a mortgage application is occupancy fraud, and misunderstanding the tax split costs real money at sale time.
02The math, step by step
Selling your principal residence after living there 2 of the last 5 years can exclude up to $250,000 of gain ($500,000 married filing jointly) from tax. Sell an identical rental at the same gain and the exclusion is $0; the gain plus depreciation recapture is taxable.
03What this is NOT
"I'll just say I'm living there" is not a shortcut. Lenders verify occupancy, and the rate gap exists because empty or tenant-occupied homes default more often.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice