What's the Difference Between a Primary Residence and an Investment Property for Taxes?

The IRS treats your primary residence and an investment property very differently when it comes to deductions, capital gains, and depreciation. For your primary residence, you can deduct mortgage interest and property taxes if you itemize, and you can exclude up to $250,000 (or $500,000 if married) of profit from capital gains tax when you sell. An investment property lets you deduct all ordinary and necessary expenses including mortgage interest, property taxes, insurance, repairs, and depreciation — even if the property shows a loss. When you sell an investment property, you owe capital gains tax on the full profit plus depreciation recapture, with no exclusion available. Converting a primary residence to a rental or vice versa can trigger complicated tax calculations, so it's worth planning the timing carefully.