A second home can be nice as a vacation spot, an additional source of income from collecting rent, or simply as an investment. Learn more about the tax implications of selling your second home.
The undertaking of selling a home often comes with a rush of questions. Is it listed at a fair price? How quickly will it sell? Do you have the right real estate agent? Not to mention the inconvenience of needing to keep your home ready to show at a moment’s notice.
But what if you want to sell a second home? Perhaps you have a vacation home or investment property that you want to divest of—is it any easier to sell than one you’re residing in? In some respects, it is easier. For one thing, there’s typically less of a need for a quick sale because your move-out isn’t contingent upon the house selling. However, there are some tax implications that sellers may not be aware of when it comes to selling a second home.
1. The Issue of Capital Gains
Capital gains are the profits from the sale of a second home. The law allows up to a $500,000 profit ($250,000 for singles) tax-free if you sell your primary home. However, capital gains tax kicks in on profits earned from selling a second home. Capital gains tax is a federal rate of 20% plus the capital gains tax of the individual state you live in. There may be more tax benefits to living in a home for at least two years as a primary residence before selling.
2. Tax Exceptions for Selling a Second Home
The Housing and Economic Recovery Act of 2008 states that while you can still claim your second property as your primary home before it’s sold, you’ll owe taxes for the time that the house was a second home after January 1, 2009. The calculation of this tax is based on the years you lived in the house as your primary residence versus the years the property was used for other purposes, like rental. This is the amount of capital gain that will be taxed from the profit of the sale of the house.
3. You May Qualify for a 1031 Exchange Tax Deferment
A 1031 Exchange is an arrangement where the seller of the second home exchanges an investment property or rental house for another investment property or rental house—of equal or greater value—with tax deferments.
This can be appealing to some sellers because they might be able to work around paying capital gains tax through the property swap. In order to qualify for a 1031 Exchange, a house has to be considered a rental house, not a primary residence. The house must be rented out for at least 15 days and used by the owner for less than 14 days, or for 10% of the total days the property was rented.
A second home can be nice as a vacation spot, an additional source of income from collecting rent, or simply as an investment. If you decide to sell your second home, be sure to know the facts before selling and seek professional advice from a real estate agent who can help you make the most out of it.