A Second Home & Capital Gains Tax Rules

Selling a second home can increase your tax bill.

Selling a second home can increase your tax bill.

The Tax Cuts and Jobs Act bill changed the rules on property tax and mortgage interest deductions, but it did not change the treatment of capital gains on a second home. The tax implications of selling a second home never included a capital gains tax exclusion, as this perk has only been available for primary homes. The TCJA did not change the amounts for a capital gains tax exclusion on a primary home, which remains $250,000 for a single owner and $500,000 for a married couple filing jointly. Eligibility requires owning and using the property as the primary home for at least two out of the five years before the sale date.

Capital Gains Tax on Real Estate

If you sell your second home, you’ll likely pay a capital gains tax of 15 percent as long as you owned the second home for more than one year. That makes it a long-term capital gain. Some people may pay less in capital gains tax or even no capital gains tax at all if they are in the 10 to 15 percent tax bracket, while those in the 39.6 percent tax bracket may pay 20 percent in capital gains taxes. The 39.6 percent tax bracket begins at $418,400 for single people in 2018 and $470,700 for married couples.

If you owned the second home for less than one year, any gains are taxed as ordinary income and depend on your tax bracket. The IRS considers a second home a personal capital asset, so the tax on the sale of the home is the same as if you sold stock or mutual funds. Report the sale of a capital asset on Schedule D of your income tax form.

Tax Implications of Selling a Second Home

While you may have capital gains on your second home, you may also experience a capital loss, especially if you did not own the property for a long time. While the IRS considers a second home a personal capital asset, it doesn’t extend the loss provision to a second home the way that it does for stocks and other assets. The IRS considers the second home a personal use property when it comes to losses. Just as you can’t claim a loss if you sell your car for less than you paid for it, you can’t claim a loss if you sell your second home for less than you paid for it. That particular tax implication also extends to primary homes.

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A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.

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