Selling a vacation home has a few distinct differences compared to selling a primary home due to the nature of the property. Because vacation homes are considered somewhat of a luxury asset, the taxes can be considerable for sellers who have seen their property appreciate over the years. Find out more about what they are, and how sellers can mitigate their financial impact.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.

Crunching the Capital Gains

Capital gains apply to any asset an individual might hold that has appreciated in value. They're taxed on a progressive scale based on the owner's total yearly income. The standard tax rate for capital gains is 15%, though those in the top brackets will be taxed at 20%. So a home that was purchased at $250,000 and sold at $500,000 could be taxed at $50,000 for top earners.

Sellers are allowed to deduct home-related expenses from the value of the home (e.g., closing costs, home renovation costs, etc) to lessen the total amount they need to pay taxes on. Capital gain taxes are typically waived in a primary home sale, but second home sellers do not enjoy the same perks.

Depreciation on Second Homes

Owners who rent their home and have claimed depreciation over their course of ownership should double-check their statements. While the home itself may have appreciated in terms of property value, claimed depreciation based on the wear and tear of the home will be the base amount for how capital gains are calculated.

Depreciation helps limit how much the owner pays in terms of income taxes on an on-going basis, but the capital gain taxes depreciation recapture when the home is sold can easily outweigh how much the owner saved when claiming rental income. If the home was purchased at $250,000 and the owner claimed $40,000 worth of depreciation, capital gains will be calculated at $210,000.

Capital Losses

Owners are allowed to deduct their capital losses from their capital gains on their tax statement. For this reason, some owners will sell both properties if their primary home has severely depreciated while their vacation home has severely appreciated. Another option is to sell the primary home and move into the vacation home to establish it as the primary residence. The owner will need to live in their new home for at least two years to qualify for up to $500,000 capital gains deduction (assuming two owners).

Legacies and Exchanges

Sellers who would prefer not to pay capital gains right now can choose to leave the property to their descendants. In this case, the children will be assigned a new value for the property based on market demand at the time of transfer.

There's also the option of a 1031 exchange, where a property owner sells their vacation home in Brentwood and then buys another property for roughly the same value. This won't eliminate the need for capital gains, but it will delay them until the owner sells off the rest of their property for good. A 1031 exchange is one of the more complicated real estate transactions a homeowner can do. It helps to hire a financial planner or real estate agent to advise the property owner about the process.

Selling a vacation home can be a lucrative decision for many owners, but taxes can easily get in the way of the total profit. Understanding the taxes and the legality behind each choice you make can be the key to making smarter decisions during the home sale.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.