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Selling a Vacation Home? Understand the Tax Implications

Posted by Chip Glennon on Monday, June 10th, 2019 at 8:30am.

Taxation on the Sale of a Vacation HomeThere may come a time when a homeowner chooses to sell their vacation home. A desire to downsize, move or purchase another type of property can make such a sale attractive. With any sale of property, tax obligations to the IRS will need to be considered.

The sale of a vacation home can differ from that of selling a primary home and tax regulations are often subject to change. Contacting a trusted tax accountant prior to listing a vacation home for sale can help navigate any potential issues. Learn more about some of the taxation concerns that may potentially burden a seller.

For informational purposes only. Always consult with a certified tax expert before proceeding with any real estate transaction.

Capital Gains Tax on a Vacation Home

Some may want to rid themselves of a vacation home and planning ahead can help when it comes time to pay the taxman. There are different regulations and exceptions that can arise from the sale of a vacation home compared to a primary residence. Any gain with a vacation home sale is usually seen as reportable income, but a seller may not use a loss as a tax deduction in most situations. A vacation home or second home is inhabited for part of the year and its address is not used on a driver's license or as a destination for bills.

A vacation home is generally viewed as a personal capital asset. It is necessary to submit a Form 1040 along with a Schedule D the year the property is sold. Any profits are taxed in a way similar to the sale of other assets, like stock shares. The length of time a vacation home is owned determines whether the seller needs to pay short-term or long-term capital gains taxes. Many hold on to their vacation home for a year or more to be able to pay long-term capital gains taxes. For the majority of taxpayers who have their vacation home for a year or more, they will find themselves in the 15 percent tax bracket when selling a home.

However, some choose to use their vacation home as an investment. In such a case, a seller can report the loss. This is not possible if the vacation home was solely used as a second residence for the family. If a home was used for investment or for rental purposes, different forms will apply after a sale.

Tax Exemption or Deferment

Tax deductions and exceptions may apply when it comes to the sale of a vacation or second home. Those using a vacation home as a rental property can increase the taxable gain of a property when sold. Complications to the adjusted tax basis occur when a property owner resides in a vacation home for some time as a primary residence. Such individuals may benefit from a $250,000/$500,000 exemption on any tax gain, in full or in part. Those intending to sell their current vacation home used as a rental property and purchase a like-kind property for the same use may be able to take advantage of the Section 1031 exchange.

Plan Ahead to Sell a Second Home

Individuals and married couples may want to learn how they may reduce the capital gains tax owed to the IRS or defer their tax payment. There are often conditions that apply long before a Kansas City home or property owner decides to sell their vacation home. Investors can use untaxed gains to their advantage, rolling them into like-kind properties of the same or greater value.

Speaking to a trusted tax accountant can provide the details necessary to see whether one needs to pay the full amount of capital gains on a profit, reduce it or defer payment to a future date.

For informational purposes only. Always consult with a certified tax expert before proceeding with any real estate transaction.

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