REAL ESTATE WATCH: The Tax Implications of Selling a Second Home

By  //  June 21, 2018

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When selling your second home, there is a less need for a quick sale since your move-out isn’t a contingent upon the home selling. However, you must understand all the issues related to the taxes on selling a house and handle them perfectly. Here are three important tax implications of selling your second home.

A second home can be an additional source of income from collecting rent, an investment, or even a nice place for a vacation. The undertaking of selling your second house often comes with an endless list of questions. How quickly will it sell? Is the home listed at the right price? Have you hired a reliable real estate agent?

There are also other inconveniences especially the need to keep your property ready to be viewed in a moment’s notice.

When selling your second home, there is a less need for a quick sale since your move-out isn’t a contingent upon the home selling. However, you must understand all the issues related to the taxes on selling a house and handle them perfectly. Here are three important tax implications of selling your second home.

1. The capital gains

Capital gains are simply the profits you get from selling your home. The law allows tax-free profits up to a $500,000 profit ($250,000 for singles) if you sell your main home. But the capital gains tax kicks in for anything you earn from selling your second home. Keep in mind that this tax is a federal rate of 20 percent in addition to the capital gain tax associated with the specific state you live in.

But there is a way of eliminating or reducing these tax amounts. You can live in your second home for about two years as your primary residence before you sell it. That means you will qualify for the tax benefits associated with selling your main home.

2. Tax exceptions

According to the Housing and Economic Recovery Act (2008), you can claim your second home as your primary home before you sell it. However, you will owe taxes for the period that the property served as a second house after January 1, 2009.

Note that the calculation of this tax amount is based on the number of years you stayed in the property as your main home versus the number of years you used the property for other purposes such as rental. This is the amount of capital gain taxes on selling a house, particularly your second home.

3. The 1031 Exchange tax deferment

This is an arrangement where you, the seller of the second property, exchanges a rental house or an investment property for another property (either of equal or greater value) with tax deferment. This is good news to some sellers because it presents them a chance to evade the capital gains tax on selling a house through swapping properties.

To qualify for the 1031 exchange, a home must be considered a rental property and not a primary residence. Besides, it must be rented out for about 15 days and you, the owner, must use it for less than 14 days or for less than 10 percent of the total number of days the home was rented.

If you’re in the process of selling your second home, it’s wise to understand all the tax implications. It’s also advisable to consult a professional who understands all the taxes on selling a house and can help you get a better profit from selling your second property. 

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