How To Report A Gain On The Sale Of A Second Home

Posted on: 5 October 2017

Because of a special provision in federal tax regulations, many individuals pay no income tax on a profit from the sale of their main residence. In addition to a main home, however, some individuals also own a second residence. Unlike the gain realized on the sale of a main residence, a gain realized on the sale of a second home may be fully taxable.

The tax code allows individuals to deduct interest on two homes, as long as the combined mortgage balance is $1 million or less. The property tax paid on two homes is also deductible. Even though each tax filer may deduct interest and property tax on two homes, only your main home qualifies for an exclusion of the gain from a sale.

If certain conditions are met, an individual can exclude up to $250,000 in gain from the sale of a main residence. For a married couple filing jointly, the exclusion limit is $500,000. In contrast, the gain on the sale of a second home is treated similarly to a gain on an asset held for investment. Therefore, you must calculate the gain by comparing the sales price with your basis in the property.

Determine cost basis

The basis of your second home is generally the purchase price plus any major improvements undertaken during your period of ownership. The costs of routine repairs and maintenance should not be included in the basis. Once you have calculated the cost basis, determine the net amount of proceeds you received from the sale.

Calculate net proceeds from sale

The amount realized from the sale of a second home is usually less than the total sales price. Reduce the sales price by your expenses directly related to the sale itself, such as the following costs:

  • real estate sales commission
  • attorney fees
  • advertising
  • closing costs paid by seller

Costs for physical enhancements, such as carpet cleaning or lawn care, should not be considered when determining net sales proceeds.

Report as capital gain

The gain on the sale of a second residence is the net sales proceeds reduced by the cost basis. The gain is a capital gain, so it may be eligible for a preferential tax rate. A capital asset is an asset owned for investment purposes or for personal use. The sale of a capital asset is reported on IRS Form 8949, which is then used to complete IRS Schedule D.

If your second home was previously used as your main residence, you may be able to exclude a portion of a sales gain from taxation. Contact an accountant, like one from The Callen Accounting Group, PLLC, for more information on the tax consequences of selling a home.


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