Whether you're selling a second home because you want to buy a different one or need cash for other reasons, Uncle Sam is going to want a piece of any profits that you make. However, your taxable capital gain is generally much smaller than your selling price, and knowing how the various exclusions work ensures you won't share more than you have to with the government.
When you sell your second home, you have to figure your gain from your basis and your net proceeds. Your basis is typically what you paid to acquire it -- including certain fees like transfer fees or recording fees. If you received it as a gift, you generally have the same basis as the person who gave it to you. If you inherited it, your basis is the home's value when the person died. But, you can increase your basis by the cost of improvements to your home. For example, if you spend $15,000 to add a garage, that adds $15,000 to your basis. Your net proceeds from the sale equal your selling price minus the costs of the sale, like your broker's fees and your legal fees. Then, subtract your basis from your net proceeds to figure your capital gains.
Primary Residence Exclusion
The IRS offers a primary residence exclusion that lets you knock off $250,000 of gain from the sale of your home. It's less likely, but still possible, that it will apply to a second home. To qualify, you must have owned your home for two of the last five years and used it as your main home for two of the last five years. Though the two years for each test often overlap, they don't have to for you to qualify. For example, say you rented a home for a year before buying it and then lived in it as your main home for another year. Those two years satisfy the use test. Then, if you used it as a second home for a year, you also satisfy the ownership test, so you would qualify to exclude up to $250,000 of the gain.
Your gains from selling your second home will count as long-term capital gains as long as you've owned the home for more than one year, in which case you'll pay the lower capital gains rates. However, if you owned the home for less than one year, it counts as a short-term capital gain, which is taxed at your ordinary income tax rates. Either way, if your income exceeds the threshold for your filing status, the gains are also hit by the net investment income tax, which adds on a 3.8 percent tax. As of 2013, the income thresholds are $250,000 if you're a joint filer or a qualifying widow or widower; $200,000 if you're single or head of household; or $125,000 if you're married filing separately.
No Loss Deduction
If you used the property as a second home, it counts as personal property rather than an investment property. The downside to that classification is that Uncle Sam doesn't let you write off losses on personal property on your taxes. For example, say your basis for the second home was $200,000 but the market went south and your net proceeds from the sale were $170,000. Even though you realized a $30,000 loss, you can't claim that loss on your taxes.
- George Doyle/Stockbyte/Getty Images
- Taxable Gain Rules for Real Estate Proceeds
- The Tax Implications of Selling an Investment Property at a Loss
- How to Calculate Income Tax Owed on a Home Sale
- Does Repainting the Interior of My Home Add to the Cost Basis?
- How to Prevent Capital Gains Taxes When Selling a House
- How to Calculate Capital Gain on Sale of House Property
- How Do Property Value Reassesments Figure Into Capital Gains?
- How to Calculate Recognized Gain