How to Calculate Vacation Home Real Estate Capital Gains Tax

While you often don’t have to pay capital gains tax on the sale of your primary residence, that’s not the case with the sale of a vacation home. The capital gains on a vacation home are calculated much the way you would calculate the sale of stock or mutual funds. The IRS considers a vacation home a personal capital asset.

As with stock, calculation of capital gains tax on the sale of property depends on whether you held it for more than one year. If you owned the vacation home for less than one year before the sale, you will not pay capital gains tax, but any gains over your purchase price are taxed at your ordinary income rate. Most people will own a vacation home for more than one year before the sale, so the long-term capital gains rate applies.

For most people, the capital gains tax rate for a second home is 15 percent, although it all depends on your tax bracket. While the Tax Cuts and Jobs Act bill passed in late 2017 did not change how capital gains on a vacation home are calculated, it did change the tax brackets. If you are in the 10 to 15 percent tax bracket, you may end up owing no capital gains tax or relatively little. Those in the other tax brackets should pay 15 percent in capital gains, while those in the 39.6 percent tax bracket may pay 20 percent in capital gains taxes. For 2018, the 39.6 percent tax bracket begins at $418,400 for single people and $470,700 for married couples.

To figure out your capital gains tax on the sale of your vacation home, you can do more than just subject the basis, or what you paid for the property, and the amount for which you sold it. You can also include the closing costs as part of your basis, so it’s imperative to keep good records. For example, if you purchased the property for $300,000 and sold it for $400,000, your capital gains are $100,000. If you include $10,000 in closing costs, you can lower your capital gains to $90,000. At the 15 percent capital gains tax rate, you will owe the IRS $13,500. If you made improvements to the vacation home over the years, such as adding a sunroom at $25,000, that cuts your capital gains to $65,000, so you would owe the IRS $9,750. Report the sale of any capital asset on Schedule D of your income tax form.