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Taxes on Sale of a Second Home

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Authored by Geoff Vaughan in Taxes 
Published on 10-10-2009

If you own a second home and decide to sell it, you need to be aware of all of the tax laws. A second home is considered any place that you own in addition to your primary residence where a person can live such as a condo, townhome, or single family home. If you have a boat or trailer that has a sleeping area and toilet, these can also be considered second homes. Understanding these rules is important to getting back all of the taxes that you deserve.

When you sell your home, the taxes will be considered either a capital gain, if you are going to make an income on the sale of the house, or a capital loss, if you are losing money from the sale of a house. If you owned your home for over a year and show a profit, this is called a long-term capital gain. The tax rate on this amount depends on how much you make a year. The average rate is usually 15% in taxes. If you owned the home for less than a year and show a profit, it is considered a short-term capital gain. The rate for a short-term capital gain is much higher and can be as much as 35%. You cannot claim a capital loss on second homes unless the home is a rental property.

The reference for capital gains is Section 121 of the tax code. Several rules apply to this code in order to be exempt from paying capital gains taxes. If you lived in the second home for two out of the past five years before you sell it you will be exempt from being taxed on up to $500,000 of gain if you are married, and up to $250,000 if you are filing individually. You can only use this rule once every two years, so you can’t sell your second home one year, and then use the rule again the next year on your primary home to avoid paying taxes. The other exceptions to this rule are if you lose your job, experience serious health problems, or go through another unforeseen event when you sell your second home. In these cases, you usually can be exempt from paying capital gains tax.

If you rent out your second home for 15 or more days during the year, you will have to report the rental income when you file taxes. Different rules also apply to the taxes of a second home if it is a rental. You can deduct any expenses that you can attribute to the rental home if you personally did not live in the house during the year for more than 14 days or for longer than 10% of the total number of days that you rented out the house during the year. You can also deduct the taxes and interest for the rental house if you are itemizing all of your deductions. In addition to these deductions, any profit or loss from the act of renting out the home must be reported as a capital gain or loss.

With all of the rules that apply to taxes on a second home, you would be wise to hire a professional tax consultant to file your taxes, as you could end up leaving a lot of money on the table if you try to file them yourself and miss some important deductions. Your tax professional should have an expertise in particular on the rules for taxing secondary homes, so that you can get the money deserved to you according to the current tax law.

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