Selling a house can be as simple as riding a bike or even as complicated as trying to figure out an unsolvable mathematical equation. The same can be said for calculating capital gains taxes when selling a second home. In order to make a profitable sale, one has to consider a lot of factors like ownership and property status.
Like all tax calculations, I can make selling your second home less complex by looking at how capital gains work and making sure that you get exactly what you bargained for. Here are a few points to consider when selling a second home.
Know the Type of Property You’re Selling
How your property is used plays a key role in making sure you go around having to pay for capital gains tax. This ultimately plays into your tax calculation and whether you are eligible for capital gains exclusions. The goal is to maximize the profit and to minimize taxes.
- Second Home or Vacation Home
This refers to a property that you live in for part of the year that’s a reasonable distance from your primary residence. Your second home cannot be subject to a rental, timeshare, or property management agreement. It’s possible to have more than one “second home” as long as they meet the IRS definition.
- Investment Property
It is a property used to generate income that’s also not your primary residence. Basically, it is a home that you don’t live in. Income generated from rental properties is taxable and has its own write-offs and deductions.
Both types of properties can avoid a capital gains tax hit by converting them into a primary residence, given that they meet the requirements of the IRS.
Turn Your Second Home Into a Primary Residence
Perhaps the best way to avoid or minimize capital gains tax is to turn a second home into a primary residence. This makes the property eligible for exclusions under IRC Section 121. The law permits a maximum gain exclusion of up to $250,000 if you’re single and $500,000 for married couples filing jointly.
To be considered a primary residence, it must first meet the ownership and use qualifications of the IRS. The test requires homeowners to own the property and live in it for a minimum of 2 years during the 5-year period ending on the date of sale.
As long as these requirements are met, your second home can now be considered a primary residence. However, you cannot invoke Section 121 if you’ve already claimed the exclusion on another home within the 2-year period before the sale of the one you’re currently selling.
Buy a House As If You’re Planning to Sell It
A good rule of thumb is to always anticipate the timing and outcome of the sale. Whether you would actually sell it or not, treating the property as if you’re going to sell it gives you an advantage. Having the insight to do this can add more value to your home and even help you make a good profit out of it.
My name is Francis Ambrosio, a real estate broker ready to assist if you need a walkthrough about capital gains tax and other concerns about selling your second home. Get in touch with me at 727.433.0372 or info(at)waterfronttampabay(dotted)com.