Thursday, June 9, 2016

Plan Ahead When Selling Your Vacation Home


Making the decision to sell your vacation home can be a difficult one. Though you are not alone. 920,000 vacation homes were sold in 2015, the National Association of Realtors reported in its 2016 Investment and Vacation Home Buyers Survey. The decision to sell, however, is just the first step in taking the right actions to ensure you don’t lose money by a lack of tax planning.

Since selling a vacation home can be very different than selling your primary residence, we have outlined some guidelines to consider.

Capital Gains on a Second Home

The proceeds from the sale of any home you own are considered capital gains. The IRS gives you a break when you sell your primary residence (up to $500,000 in profit is exempt for a married couple, $250,000 for a single person). However, with a vacation home, you’ll pay a capital gains tax on the net proceeds from the sale of your home, just as you would when selling stock shares. To determine your net proceeds, deduct the amount you originally paid for your home and the closing costs from the amount you sell your home for.

For example if you bought a house for $150,000 and sold it for $250,000 with closing costs of $5,000, your taxable net proceeds would be $95,000. Capital gains tax is no higher than 15% for almost all taxpayers unless you sit in the very highest tax bracket, you may be looking at 20%.

Make Your Vacation Home a Permanent Residence

As a homeowner, you must have owned and used the home as your principal residence for two of the five years preceding the sale. That means if you sell your primary residence and make your vacation home the primary residence for two years, you can avoid the capital gains tax. Again up to $500,000 for a married couple, $250,000 for a single person. There is no limit to the number of times a taxpayer may claim this exclusion.

Document Home Improvements

Money spent on home improvements can be deducted from net proceeds. This is especially helpful if you’ve done significant updating. Records of all improvements and costs must be documented and readily available. If you spent $15,000 updating your kitchen with granite and new cabinets and you spent an additional $10,000 on landscaping your backyard, that means $25,000 can be deducted from your net proceeds. Keep in mind, regular maintenance and upkeep does not qualify.

Leave Your Home to Your Children
Leaving a vacation home to children will shelter any gain the home has seen since initial purchase. If your $150,000 vacation home is worth $300,000 when you pass away, your children will escape capital gains tax on the $150,000 appreciation. It is important to discuss your options with your children to make sure they want to be gifted the home. Althought this seems pretty straightforward, you would be surprised how many families do not have this discussion beforehand.


Offset Your Gains with Losses

Capital losses can help offset gains you may have in your home. This is beneficial if you sell stocks and bonds that incurred losses the same year you sell your home. An experienced financial advisor will likely be able to help you with this process.

Paying tax on a portion of your vacation home sale may be inevitable, but we encourage you to do your research and keep records in order to reduce your payout. If you don’t have a financial advisor, it may be worthwhile to consider talking with a few to determine your best strategy. The main takeaway from all of this- It costs money to own a vacation home! You knew that. But that money is well spent escaping the world every weekend and we don’t think there is anything much better in life than that.

If you have questions regarding buying or selling a lake home in the Brainerd Lakes area, please call us at 218-820-7355 or email We have decades of experience and are happy to help!