“Personal use property” is a tax term that refers to all the things you own and use for yourself. These can be common objects such as your car or home appliances. The term also extends to things that aren’t as common, such as art or light fixtures. In contrast, investment property is purchased with the express intent to profit from its sale.
Let’s take a look at personal use property, how it works, and how it differs from investment property.
Definition and Examples of Personal Use Property
Personal use property is whatever you own and use without the primary intent to profit from its sale. Even if you’re unfamiliar with the term “personal use property,” it’s almost certain it is something you already have. The clothes you wear, the food in your pantry, and your cellphone all constitute personal use property. Personal use property can’t be used for business or rental purposes.
There are tax implications when selling personal use property. Although you can’t claim a deduction due to losses that come from the sale of your personal use property (as you can with losses incurred when you sell an investment property), you are liable to pay taxes on any gains you receive on both types of property.
In some cases, a piece of property may be both personal use and investment property. This can occur when, for example, you both rent out and occasionally stay in a cabin you own.
How Personal Use Property Works
Let’s say you purchased a home seven years ago. You and your family have lived in it ever since, but now your mother is sick and needs to move in with you. Your current property isn’t large enough; you’ll have to move. You sell the house and make a $200,000 profit, also known as a capital gain.
This house wasn’t purchased as an investment property—it was meant to be a lifelong home—so it’s a personal use property. That means you’re eligible to exclude some gains from consideration for capital gains taxes. (IRS rules say you must have owned and lived in the house for at least two of the last five years to qualify for the exclusion.) You can exclude up to $250,000 worth of gains, or up to $500,000 if you’re married and filing jointly. So you’ll end up owing no capital gains taxes from the sale of your home. In contrast, there are no capital gains exclusions allowed for investment properties.
Now let’s say you purchased a vacation condo by the beach. A few years on, you realize that you and your family don’t visit very often. In fact, it’s generally vacant. As a result, you decide to start renting out the property to short-term vacationers with the intent of visiting occasionally.
Although the condo began as personal use property, by renting it out most of the year, it has now become a mixed personal use and investment property. Come tax time, you’ll need to calculate the amount of time you spend there versus the amount of time you have tenants. This will determine how you may deduct certain expenses such as mortgage interest, real estate taxes, casualty losses, maintenance, utilities, etc., which will ultimately reduce the amount of rental income that's subject to tax.
Certain expenses, such as mortgage interest, real estate taxes, maintenance, and utilities, may be tax deductible for your investment property.
If you ever opt to sell your condo, you’ll also be responsible for taxes on the capital gains you receive. The rate of your taxes will depend on how long you owned the condo and your taxable income.
Personal Use Property vs. Investment Property
|Personal Use Property||Investment Property|
|Purchased and used primarily for yourself||Bought with the primary intent to profit from its sale|
|Liable for capital gains, although you can qualify for an exclusion||Must pay capital gains|
|Taking a loss on a sale does not grant you a deduction on your taxes||Losses on investment property qualify for tax deductions|
As mentioned, the main difference between personal use property and investment property is how you use it. A watch you wear each day isn’t considered an investment property, but buying stocks is, as are collectibles that you purchase and keep to sell for a profit.
- Personal use property consists of the items you buy and use each day.
- You’ll need to report capital gains on both personal use and investment properties, although you may be able to exclude up to $500,000 of those capital gains for personal use property if you’re married and filing taxes jointly, and if your home qualifies as your primary residence.
- You may be eligible for tax deductions if you lose money on the sale of your investment property, but not if you lose money on the sale of personal use property.
IRS. “Topic No. 409 Capital Gains and Losses.” Accessed Dec. 10, 2021.
IRS. “Topic No. 701 Sale of Your Home.” Accessed Dec. 10, 2021.
IRS. “Topic No. 415 Renting Residential and Vacation Property.” Accessed Dec. 10, 2021.
IRS. “Sales and Other Dispositions of Assets. Page 20. Accessed Dec. 10, 2021.