Updated: Jan 18
Homes are hot right now. According to realtor.com, the April national median listing price for active listings was $375,000, up 17.2% compared to last year. If you are selling your primary home or vacation home for a profit, be aware of the tax rules.
The rules do vary for primary and vacation homes.
Primary Home Sale
If you owned and lived in your home for two of the last five years before the sale, then up to $250,000 of profit may be exempt from federal income taxes. If you are married and file a joint return, then it doubles to $500,000.
To qualify for this exemption, you cannot have excluded the gain on the sale of another home within two years to this sale. Please consult a professional with tax expertise regarding your individual situation.
This profit would be excluded from your taxable income. In fact, the sale may not need to be reported unless you receive a Form 1099-S or do not meet the above requirements.
If you sold your home at a loss, unfortunately, you can’t deduct the loss.
There Are Exceptions
Even if you do not meet the above requirements, you may qualify for the exclusion on primary home capital gains if you meet one of the criteria below.
If you receive the house in a divorce settlement
If you are able to count short-term absences as time lived in the house
If a surviving spouse who has not remarried can count the time that the deceased spouse lived in the house.
The five-year test period can also be suspended for up to ten years in cases where any spouse has served on “qualified official extended duty” as a member of the military, foreign service, or federal intelligence agencies.
Even if you don’t pass the five-year rule test, a reduced exclusion may be available if you have a change in employment or health, or because of unforeseen circumstances, such as divorce or multiple births from a single pregnancy. Have a discussion with your tax-preparer to learn more.
Vacation Home Sale
You may be obligated to pay capital gains and other taxes on the sale of a vacation home.
If you own the home for more than a year, you’ll pay long-term capital gains taxes, and the tax rate depends on your income level.
If you own the property for less than a year, you’ll pay short-term capital gains taxes, and the rate is the same as your ordinary income-tax rate.
For most taxpayers, it’s advantageous to wait at least a year after purchasing a second home before selling.
If you use your vacation home as a rental property, the taxes are more complex. You may have to pay taxes on depreciation you have previously written off. An introduction can be found in the article Selling a Vacation Home: Understanding Capital Gains on the Sale of a Second Home on Zillow.
Taxes on the sale of a vacation rental are complicated. Please speak with a knowledgeable tax professional regarding your situation. Contact me if you are thinking about selling your home and would like to have a discussion about reinvesting the proceeds in real estate or another asset.
Are you comfortable with your progress towards retirement? How about helping future generations meet their financial goals? If you have a net worth over $2 million and need help from a wealth manager, the Peak Wealth Planning team can assist you.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.