When you sell a Second Home, you may not get the tax advantages unless the home was an investment property and can defer capital gains.
Q: We are considering selling a second home to find another one closer in proximity to our permanent home. We do not want to sell until we find another house we like.
Is there a way to avoid capital gains tax, if the second home is sold after we have a contract on the new second home? I have not been able to find any information on such a situation anywhere — thus I suspect it is not possible.
A: The reason you have not found much information to assist you in your tax planning is that the federal income tax benefits of owning a second home are limited. It appears that you are expecting to realize a fair amount of profit from the sale of the second home. Good for you! But that home may not have been an investment for you in the way you imagine.
If a second home is an investment property (an investment in real estate), Section 1031 of the Internal Revenue Code would allow you, as an investor, to defer the payment of any federal income taxes associated with the sale of your property if you buy a replacement property and follow the strict rules associated with that section using a 1031 exchange (also known as a starker trust or exchange).
However, in your circumstances, if you are selling a second home that you’ve used for your own benefit and not as an investment, we’re not aware of any particular provision that would allow you to sell this home and buy another and avoid or delay the payment of capital gains taxes on the sale of the second home. Unfortunately our personal finance advice can’t create a tax benefit out of thin air for you and only those in Washington can.
The silver lining for now is that federal capital gains tax rates are historically low at 15 percent and you can take advantage of those rates if you sell now. Also, you may deduct from your profit the cost of purchase, the cost of sale, and any capital improvements you may have made over the years to the property. Your tax preparer, accountant or enrolled agent may be able to answer further questions.
Leave A Comment