Taxes and Selling a Second Home
When it’s tax time, you may have questions regarding the sale of your second home. Do you have to pay capital gains? All that depends on how you used the home – as a residence, a rental, or both.
The sale of any home begins with establishing the tax basis – the amount you paid for the home or its fair market value at the time you inherited it. Your basis can increase or decrease depending on the improvements you made to add value, whether you depreciated the home as a rental, and other factors. In simplest terms, your capital gain is based on the sales price minus the basis and allowable deductions.
A second home, explains HRBlock.com, can include houses, mobile homes, condos, co-ops, trailers, and houseboats. The IRS considers second homes to be capital assets. The sale of a second home is reported on Schedule D (1040) if it’s not disclosed on any other form. If you owned your second home more than one year, it’s a long-term capital gain on the profit; a short-term capital gain is on a profit of a second home you owned one year or less. When you sell a second home, Merrilledge.com says you’ll owe capital gains on any profits, with certain exclusions.
If you purchased your home as your primary residence, and it was your primary residence for at least two of the five years immediately preceding the sale, you can exclude up to $500,000 of gains on the sale if you're married and filing jointly, or exclude $250,000 if you’re single. You’ll also be able to deduct real estate taxes and points paid to buy your second home. Your mortgage interest deduction could be limited if your mortgage is more than the fair market value of your home or if the combined mortgages on your primary home and second home are more than $500,000 for single filers or $1 million for married joint filers.
Where the tax picture grows more complicated if you used the second home for rental income. If you rented the home less than 15 days within the tax year, you don’t have to report the income, but you must report the income if you rent the home more than 15 days within the tax year.
Your second home can still be considered a residence if you rent it for more than 15 days within the tax year or 10% of the number of days you rent the home at fair rental value. You can deduct your interest and taxes, as well as other rental expenses such as depreciation. However, you can only deduct up to the amount of the income minus the deductions for interest and taxes. The IRS recommends carrying over any rental expenses not deductible under this rule to the next year.
If you rented out your second home for profit, any gains are taxed as capital gains. You can adjust your basis higher by adding the cost of improvements you made to increase the value of the property, such as a new roof, expansion or new appliances, landscaping, etc., says Smallbusiness.chron.com, and you can deduct any closing costs and legal fees you paid. You must account for any depreciation you claimed for the property and its improvements as you already received a tax break against the rental income you earned.
Confirm all information with your tax attorney, CPA or tax professional.