Capital Gains Taxes on the Sale of a Second Home

Capital gains tax applies when you sell an asset for more than what you paid for it. While the IRS typically offers an exclusion for capital gains from the sale of a primary home, the rules are a little different when selling a property that you don’t live in full-time. Before unloading a vacation or rental property, it’s important to understand how capital gains on the sale of a second home work.

A financial advisor can help you with a tax plan if you’re selling your second home.

Capital Gains Tax Exclusion

A capital gain represents a profit on the sale of an asset, which is taxable. The IRS allows taxpayers to exclude certain capital gains when selling a primary residence. The capital gains tax exclusion limit for the sale of a home is $250,000 for single filers, or up to $500,000 for married couples who file a joint return. So, you wouldn’t owe capital gains tax on any profits from the sale up to the exclusion limit for your filing status.

To qualify for this exclusion, the owner of the home must meet an ownership test and a use test. You pass these tests if you’ve owned and used the home as your primary residence for at least two of the five years before the sale. You’re typically not eligible for the exclusion if you excluded gains from the same or another home during the two years prior to selling your current home.

Capital Gains on Sale of Second Home or Vacation Home

The IRS treats second homes differently when calculating capital gains tax. It categorizes second homes that are not used as primary residences, including vacation homes and investment properties, as capital assets. That means if you don’t pass both the ownership and use tests for the property, as mentioned earlier, then the IRS will not allow a capital gains tax exclusion.

The amount of capital gains tax you’ll owe on the sale of a second home depends on several factors, including:

How long you owned the home
What you originally paid for the home
Capital improvements you made to the property
The final sale price
The resulting profit from the sale
Your filing status and income
The applicable capital gains tax rate

The IRS assesses capital gains tax at either short-term or long-term rates, depending on how long you held the asset. Short-term capital gains, from assets held one year or less, are taxed at the same rate as your ordinary income, based on your tax bracket. Long-term capital gains, from assets held more than one year, are taxed at lower rates that depend on your income and filing status.

Calculating Capital Gains on Sale of a Second Home

To calculate capital gains tax on a second home, start by finding your profit, which is the sale price minus your purchase price and qualifying improvement costs.

To figure out how much you owe in capital gains tax when selling a second home, you’d first need to calculate the actual profit from the sale. This requires determining your cost basis in the property. The cost basis is how much you paid to purchase the property, versus how much you invested in it while you owned it.

Here’s an example: Let’s assume you purchased a vacation home 10 years ago for $200,000. You spent $25,000 making upgrades and improvements to the property. Five years later, the property’s value is $500,000, so you decide to sell. You pay $30,000 in commissions to your agent and the buyer’s agent, plus another $5,000 to close the sale.

Your cost basis is $225,000 ($200,000 to purchase it plus $25,000 in upgrades). You sell the home for $500,000, less the $35,000 in commissions and closing costs, for net proceeds of $240,000. Unless you can show that you meet the ownership and use tests for the home, you’ll owe capital gains tax on this amount.

Since you owned the home for 10 years, the long-term capital gains tax rate would apply. The rate you pay depends on your income and filing status. To qualify for the 0% capital gains tax rate in 2026, single filers need to earn less than $49,450. Single filers with income above $545,500 are taxed at the 20% capital gains rate.

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How to Minimize Capital Gains Tax on the Sale of a Second Home

If you’re worried about a large tax bill when selling a second home, there are steps you can take to cushion the blow. Some of the options for minimizing capital on the sale of the second home include:

Renting out the property instead of selling it. This would let you treat the property as an investment and claim depreciation and other deductions.
Making the property your primary residence. By doing so, you could qualify for the capital gains tax exclusion.
Using a 1031 exchange to defer capital gains tax. This option is only available when you hold both the sold property and the replacement property primarily for business or investment purposes. Personal residences, vacation homes or second homes used mainly for personal reasons don’t qualify for this type of tax deferral.
Using tax-loss harvesting to offset some of your tax liability from the sale. This involves selling other assets at a loss to offset capital gains.

Note that while tax-loss harvesting can help reduce your tax bill, it has limits. Capital losses first offset gains of the same type (short-term losses against short-term gains, and long-term losses against long-term gains). From there, any remaining losses can then offset gains of the other type. If losses still remain, it’s possible to apply up to $3,000 against other income each year, with excess losses carried forward. As a result, tax-loss harvesting may reduce the gains from selling a second home, but it won’t fully eliminate them.

Talking to a financial advisor or tax professional can also help you gauge whether selling a second home makes sense from a tax perspective. They can also offer advice on what to do with the proceeds once the sale is complete.

Selling a Second Home vs. Selling a Primary Residence

The IRS treats the sale of a primary residence differently from a second home when it comes to capital gains taxes. If you sell your primary residence, you may qualify for the home sale exclusion. This exclusion allows single filers to exclude up to $250,000 in capital gains ($500,000 for married couples filing jointly). To claim it, you must have lived in and owned the home for at least two of the past five years.

A second home, such as a vacation property or a rental that isn’t your primary residence, does not qualify for this exclusion. Instead, the profit from the sale is subject to capital gains tax. Whether short-term or long-term rates apply depends on how long you owned the property.

Additionally, if you previously rented out the second home, you may also face depreciation recapture. This means that any depreciation claimed during rental years will be taxed at a 25% rate when you sell.

If you want to reduce capital gains taxes on a second home, there are strategies you can take. One is to convert the property to a primary residence for at least two years before selling. Or, if your properties are held primarily for business or investment purposes, you may consider a 1031 exchange to reinvest in another investment property. Either of these approaches may help defer or minimize the tax burden you face.

Bottom Line

Capital gains tax is common when selling a second home, but estimating the cost in advance can help you plan the sale and manage the tax impact.

Capital gains tax is often unavoidable when selling a second home. That shouldn’t deter you if you feel the time is right to sell, though. Estimating how much you might pay using a capital gains tax calculator can help you develop a strategy for the sale while minimizing what you owe in taxes. As with anything tax related, planning ahead is what makes the biggest difference.

Tax Planning Tips

Consider talking to a financial advisor about capital gains tax on the sale of a second home if you have a property you’re planning to sell. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. From there, you can have a free introductory call with your advisor matches to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Tax planning is an important part of investing, and there are different ways to approach it. If you’re considering real estate as an investment, for example, you may choose to open a self-directed IRA to hold rental properties. A self-directed IRA is designed to hold investments that a typical IRA cannot, including real estate, precious metals and commodities.