How to Sell Vacation Homes With Capital Gain Taxes

Vacation homes are becoming increasingly popular within the United States. According to Cnnmoney.com, Americans purchased over 3 million vacation homes in 2006. Some buyers seek a vacation home for enjoyment while others tend to view it more as an investment. All vacation home owners share the common concern over capital gains taxes when it comes time to sell their vacation home. Minimizing capital gains taxes from a vacation home sale can be accomplished using various techniques.

Things You'll Need

• Copy of the U.S. Tax Code

Instructions

1. Avoid selling your vacation home less than one year after you purchased it. Own the vacation home for at least a year in order to take advantage of the lower long-term capital gains tax rate, which was 15 percent in 2010, according to the Internal Revenue Service. Consider leasing the vacation home out for a few months prior to selling if you are short of meeting this holding period requirement.

2. Attempt to make your vacation home your primary residence for at least two of the prior five years. Pay no capital gains tax on the first $250,000 in capital gains if you meet this requirement, according to the IRS. Claim an exemption of up to $500,000 of capital gains if you meet this requirement and file your taxes jointly as a couple.

3. Hire a real estate agent familiar with your vacation home's area once you have met the thresholds for your desired capital gains tax treatment. Attempt to sell the vacation home yourself, thus avoiding broker fees if you are adept at such undertakings. Negotiate a price with the most attractive buyer taking into consideration any contingencies that might be a part of the offer. Close the transaction with the guidance of qualified real estate counsel.

4. Report the sale on your federal income tax return for the year during which the transaction closed. Claim long-term capital gains tax treatment or complete exemption from capital gains if you meet the criteria currently in force. Research whether you are obligated to pay capital gains tax to the state where the vacation home is located or to the state of your domicile. File your state tax returns accordingly.

5. Retain your original closing documents from the purchase of your vacation home along with the documents from its sale. Save copies of your applicable state and federal tax returns and all documentation backing up your capital gains calculations.

Tips & Warnings

• Improvements added to your vacation home could be added to your purchase basis thus decreasing your capital gains tax liability.

• Seek advice from a qualified tax professional if any component of the tax code is not clear to you.

References

• Cnnmoney.com: Second Home Sales at All-Time High
• IRS Topic 409: Long Term Capital Gains Tax
• IRS Topic 701: Sale of Your Home

Resources

• The Wall Street Journal: Tax Flubs Vacation-Home Owners Make When Selling Their Houses
• Smartmoney.com: Taxes on Vacation Homes