The IRS considers your vacation home to be a capital asset. This is something you own that generates income. When you eventually sell your vacation home, you will owe the capital gains tax on your sale. You won't owe taxes on the entire sale proceeds though; you'll get your investment in the property back tax-free. Before making a decision to sell, it makes sense to calculate your tax liability. Fortunately, this is a fairly straightforward tax calculation that only needs a few pieces of information.
Look up the original amount your paid for the vacation property to determine its initial basis. This includes the sales price plus any taxes and fees you paid as part of the deal.
Add the value of any improvements you made to the property to its original price to calculate its adjusted basis. For example, if you paid $30,000 to add a deck to your $100,000 home, its adjusted basis would be $130,000.
Subtract your vacation home's adjusted basis from the sale price to calculate your total capital gain.
Determine how long you owned your vacation home. If you owned the property for less than one year, your gain is a short-term gain. If you owned the property for over a year, your gain is a long-term gain.
Multiply a short-term gain by your income tax bracket to calculate your total tax liability.
Multiply a long-term gain by the long-term capital gains rate of 15 percent to calculate your tax liability.
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