What Tax Implications Come with Selling Your Second Home?
Taking on the task of selling your home tends to come with a list of questions. Is it listed at a fair price? How long will it sit on the market? Do any updates or renovations need to be made? Do you have the right real estate agent?
Now, what if you want to sell a second home? Maybe you have a vacation home or investment property that you want to get rid of—is it any easier to sell than the one you’re residing in? In some ways, yes. For one thing, there’s typically less of a need for a quick sale because your move-out is not dependent upon the house selling.
There are, however, a few tax implications that go hand in hand with selling your second home that many homeowners do not know about of until it is too late. With the traditional tax season having just ended, and many homeowners left with questions as to what happened, or what their options are in the future, it only makes sense to share some of the factors that homeowners ought to be aware of prior to listing their second property.
Capital Gains
Capital gains are the profits that the homeowner in question made from the sale of a second home. The law allows homeowners to earn up to a $500,000 profit for couples, $250,000 for singles on the sale of a primary tax-free. That said, it is important for homeowners to understand that capital gains tax kicks in on profits earned from selling a second home.
What is the Capital Gains Tax?
The capital gains tax is a federal rate of 20% plus the capital gains tax of the individual state you (the homeowner) currently resides in.
Tax Exemptions for Selling a Second Property
In 2008 the government created what is called The Housing and Economic Recovery Act of 2008. This act states that while property owners can still claim your second property as your primary home before that house is sold. If this happens, you will owe taxes for the time that the house was a second home the following tax season. The calculation that is made of how much tax is based on the years that the owner lived in what is now being called the second house as opposed to the years that the property was used for other purposes. This is the amount of capital gain that will be taxed from the profit of the sale of the property.
A second home can be a wonderful treat for a long time of hard work and perseverance, a vacation spot, an additional source of income, or simply as an investment. Far too often homeowners go to sell their property without knowing the facts and end up being burned during tax season.
If you make the decision to sell your second home, be sure to know the facts before selling, take some time to do your research and to seek professional advice from a real estate agent who can help you make the most out of it.