How to avoid capital gains tax on vacation home

Dear Tax Talk,
I am in the middle of a divorce. If we sell our second home, which was a vacation home, do I have to pay capital gains tax if I use the money to buy a permanent primary home for myself?
— Dianne

Gary Burchell/Getty Images

Dear Dianne,
If you meet the IRS requirements, you are able exclude capital gains of up to $250,000 ($500,000 if married filing jointly) only on the sale of your main home. That generous capital gain exclusion isn’t applicable for a secondary home, even if you use the sales proceeds to buy a primary home for yourself.

However, in your situation, since you own more than one home, you should look closely at what is considered your “main” home. It not only depends on where you spend most of your time, but also other facts and circumstances, such as what address you have on your driver’s license and voter’s registration, where you work and so forth.

The IRS requirements for exclusion of the gain are as follows:

1. You owned the home and used it as your main home during at least two of the five years leading up to the date of the sale.
2. You did not acquire the home through a like-kind exchange (also known as a 1031 exchange) during the past five years.
3. You did not claim any exclusion for the sale of a home that occurred during a two-year period ending on the date of the sale of the home you are selling.

If you determine that you are unable to exclude the gain on the sale of the second home, there are possibly some planning opportunities for you if you are flexible. For example, you can live in the vacation home over the next two years to establish it as your main home, and then you’ll be eligible for the capital gains exclusion.

I do not have your specific information, so I suggest that you sit down with a qualified tax professional who knows the tax ramifications for divorced or separated individuals and also the requirements on excluding the gain on the sale of your main home. Also, please take a good look at IRS Publication 504, Divorced or Separated Individuals, as it contains some valuable information that may apply to you.

Finally, be sure to make a list of your questions and concerns prior to the appointment with the tax pro so it can be a productive meeting. Be prepared to bring a copy of your most recent income tax return along with a list of all assets and liabilities that are part of the divorce.

Thanks for the great question and wishing you all the best.

RATE SEARCH: Compare mortgage rates at Bankrate.com today!

Ask the adviser

To ask a question on Tax Talk, go to the “Ask the Experts” page and select “Taxes” as the topic. Read more Tax Talk columns.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

Bankrate’s content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate’s Terms of Use.

Posted by Matiah Fischer on Friday, November 26, 2021 at 7:30 AM By Matiah Fischer / November 26, 2021 Comment

Do you own a vacation home that you’re thinking about selling? Maybe you’re tired of the location and want to vacation in other destinations. Or perhaps the home values have gone way up from what you paid, and you want to sell your vacation home and buy another. No matter your reasons for selling your vacation property, here are some of the important things you need to know before selling a vacation house. 

How to Sell a Vacation Home

One of the biggest challenges about selling a vacation property is typically the fact that you don’t live there full-time. This can make getting the house ready to sell more difficult. Plus, you might not know the market very well or be up to date on changes in that city’s real estate market, so pricing accurately can be a concern. Here’s a short guide with tips on how to sell your vacation property!

Preparing to Sell Your Vacation Home

1)    Interview local real estate agents

2)    Determine the fair market value of your house

3)    Figure out the things you need to repair

4)    Determine how you can increase your home’s value

5)    Consider the tax implications (scroll) for selling your vacation home

6)    Get house clean and ready for showings

7)    Agree on listing price and put home on the market 

What’s the Easiest Way to Sell a Vacation Home When You Don’t Live There?

Obviously, most people don’t live in the same city as their vacation property. Otherwise, would it really be a ‘vacation’ home? The fact that you could be located hundreds or thousands of miles away can complicate the selling of your home. But with modern technology, selling a home can be done easily from anywhere in the world. 

The easiest way to sell your vacation home or condo when you don’t live there is to work with a local real estate agent. Yes, you’ll have to pay a commission fee for the successful sale of your home; but having representation and the expertise of a local real estate expert can be well worth it. 

For example, when selling a vacation home in Las Vegas we recommend you work with a local real estate agent who knows the market and how to price your home properly. Things change and real estate markets move fast. Trying to sell your vacation home by yourself when you don’t live in that market is a recipe for mistakes and headaches. 

Selling a Vacation Home and Buying Another

In the case that you want to sell your vacation house and buy another at the same time, you’ll want to have the help of a real estate agent or team who can list your house and handle the sale of it, while helping you find another property at the same time. 

It’s a good idea to have your financing in order as well, which a mortgage professional can help with. Then, it often comes down to the timing of the sale and escrow of the house you’re selling, and contingencies negotiated on the home you’re buying, in order to sell and buy at the same time. 

What are the Tax Consequences of Selling a Vacation Home?

One of the final things you should consider before you sell a vacation property are taxes. While not many like to pay them, it’s a fact of life that certain financial transactions are taxed by the government. Here are a few commonly asked questions about taxes when selling a vacation home.

Do I Pay Taxes on the Sale of a Vacation Home?

The answer is yes, you will likely pay taxes when selling your vacation property. Unless you qualify for the primary home sale exclusion, which states you had to have lived in the home as your primary residence for at least two out of the past five years – and complied with other IRS rules – you will pay capital gains tax when selling your vacation house. 

Capital Gains on the Sale of a Vacation Home

Since your vacation home is typically a second home that you haven’t lived in full time, the IRS considers it a “personal capital asset”, which makes selling a vacation house similar to selling stocks and subject to capital gains tax.

Depending on your income and whether or not you’ve owned the home for more or less than one year, your capital gains tax when selling a vacation property could range from 0% - 20%. Be sure to check with the IRS, as tax rates and policies are subject to change.

How Can I Avoid Capital Gains Tax when Selling a Vacation Home?

To avoid paying capital gains taxes when selling a vacation home, you might consider not selling, using the property as your primary residence, renting out the property or using a 1031 exchange. 

In Closing: Selling a Vacation Property

Ultimately, the decision is up to you on whether or not you’ll sell your vacation home. Take time to consider your options such as if you still want to vacation in that location and where else you would rather own a vacation home. And don’t forget about the factors of selling a vacation property including the local real estate market and tax implications. 

You can take stress away when selling a vacation home by working with a local real estate agent. And just remember, it was a home or condo you used for vacations, and vacation is supposed to be fun. Don’t stress out and instead, look forward to your next vacation house!

Disclaimer: This article is for general informational purposes only and should not be considered as financial, tax, accounting, real estate or legal advice or a legal opinion on specific facts or circumstances, nor a solicitation of tax, accounting or legal business. You are urged to consult an experienced CPA or attorney concerning your particular actual situation and any specific financial, tax or legal questions you may have. No client relationship is formed as a result of any exchange of information.

How do I avoid capital gains tax on a second home UK 2022?

How can I get away with capital gains tax?