capital gain

kaconine

I have recently sold a vacation home, not primary residence. What are the tax implications on this sale? If another real estate purchase is made can the capital gains taxes be avoided? Can the purchase be land only, or does it have to have a building on it?

Henry

Hi kaconine! These are great questions. It's a good idea to be thinking ahead about the tax implications of your vacation home sale so you know what to expect when it's time to file your return. Here are a few things you'll want to be aware of:

Unlike your primary residence, there is no exclusion of gain when selling a vacation home. The home is considered by the IRS to be a personal capital asset, similar to stocks, artwork or antiques. You'll be subject to capital gains tax on the profits from the sale.

The good news is that you may be able to lower your taxable gain by accounting for your selling expenses and the cost of any improvements you made to the home (not repairs or maintenance costs) when determining your profits from the sale. You can refer to IRS Publication 523 for more information about figuring your gain.

The tax rate that applies will depend on how long you owned the home and your annual taxable income.

-If you owned the home for more than a year, you'll pay long-term capital gains taxes. Go here to see the current capital gains tax rates.

-If you own the property for less than a year, you'll pay short-term capital gains taxes, which is the same as your ordinary income tax rate.

The IRS does allow a tax-deferred exchange, known as a section 1031 exchange, where you defer paying capital gains taxes by swapping one investment property for another similar property. The IRS instructions stipulate that "For 2018 and later years, section 1031 like-kind exchange treatment applies only to exchanges of real property held for use in a trade or business or for investment, other than real property held primarily for sale." If your property was primarily used as a vacation home for personal purposes, rather than held as an investment property, then the option to defer your gain using a section 1031 exchange typically will not apply to your situation.