What Is Occupancy Fraud?

Mary McMahon

Occupancy fraud is a false claim that a structure is owner-occupied in order to access better loan terms or avoid capital gains tax. In both cases, the goal is profit, either by paying less interest or reducing tax liability when a structure is sold. Mortgage lenders and tax authorities can pursue cases of suspected occupancy fraud in court to recover damages. Owners may be required to sign affidavits in connection with purchases and sales to testify that they are truthfully declaring the property’s uses, and they can be held liable for falsifying legal statements.

Man climbing a rope
Man climbing a rope

On mortgage applications, lenders usually charge less interest for a home that will be occupied by the owner because of the reduced risk of default. When people claim a home is a primary residence or second home, they may get better terms. They may also be eligible for special financing benefits, like government programs intended to help first-time home buyers or to subsidize primary residences. Owners may purchase a property as an investment, but claim they will live in it in order to access these better terms.

This form of occupancy fraud can be a particularly large problem in poor market conditions. When interest rates are high people have an incentive to seek out lower interest rates by any means possible, including fraudulent ones in some cases. Lenders in a tight credit market may be reluctant to extend loans with increased risks, in which case people attempting to buy investment property might claim to be buying a residence in order to get a loan. During the loan application process, the lender may check real estate records and other references for signs of fraud to see if the buyer is already claiming multiple homes as residences.

The other sense of occupancy fraud involves home sales, rather than purchases. When people sell a home, they are required to pay capital gains tax on the profit realized from the sale, unless it has been their primary residence. Sellers may claim that they lived in a home for the required amount of time either to avoid capital gains, or to have access to special kinds of real estate transactions reserved for residences. Tax authorities monitor capital gains exemptions closely for signs that people may be attempting occupancy fraud.

There are situations in which people may legitimately own multiple residences, for a variety of reasons. For legal purposes, they may be required to designate one as a primary residence, and another as a second home. These homes may be eligible for tax benefits and better loan terms, but the other residences may not. People with questions about how to handle multiple homes can discuss the situation with an accountant to get the benefits they may be entitled to while avoiding fraud.

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