Nicholas P. DiNatale, CPA -
Certified Public Accounting & Business Advisory

Taxpayer Resources - FAQ

I sold my vacation home this year, will there be a tax on the gain?

Recently, homeowners were given a gift by congress. Effective for sales after May 6, 1997, gains of $500,000 for married taxpayers filing jointly, ($250,000 if filing singly) on sales of principal residences were excluded from tax, of course, complicated by various rules. This replaces the previous rules that provided a one-time lifetime exclusion of $125,000 for homeowners aged 55 or older. The preferential treatment is only available for a taxpayer’s primary residence, which is a home owned used by the taxpayer and used as their principal residence for 2 out of the 5 years previous to the sale. Vacation homes are treated differently.

Gains on the sale of a second home are taxable unless you have lived in your vacation home as your primary residence for 2 of the past 5 years. Unfortunately losses on these sales are still not allowed. The gain on the sale of a vacation home rented to third parties is increased for the amount of depreciation allowed during the time the vacation home was rented to third parties. This is usually the situation if the home was rented for more than 15 days. The accumulated depreciation expense will reduce your basis and increase your gain. Fortunately, losses on the rental portion of the second home are deductible as ordinary losses.

This 2 of 5 rule provides a tax planning opportunity for taxpayers owning a primary residence and a vacation home. If a home was rented for less than 15 days per year, and therefore most likely not depreciated, a taxpayer can sell their primary residence and move into the vacation rental for two years. At the end of the two year term, the taxpayer can then sell this home, and exclude the gain from this sale as well. For further details on this and other tax strategies, consult with your tax advisor.

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