Whether you’ve grown tired of skiing in the Rocky Mountains in Colorado or no longer feel the pull of the ocean from the Tunnels Beaches in Hawaii, there may come a time when your vacation home feels less like a vacation and more like, well, work. Whether that means work to maintain it or work to make sure you visit it a couple of times a year, it can be wearing, and selling only makes sense.
Before you put up a “For sale” sign, though, there are a few things you need to know.
What are Capital Gain Taxes?
If you haven’t heard of them already, you’re going to hear plenty about capital gain taxes as you prepare to sell your vacation home. Essentially, capital gains are the taxes you’ll pay on any profit you make from the sale of a secondary home. For example, if you purchased the vacation home for $600,000 and then sell it for $1 million, you’ll be taxed on the $400,000 profit earned from the sale.
How much you’ll be taxed depends on how long you’ve owned the property. Short-term capital gains, meaning you’ve held the property for one year or less, are taxed at the same rate as ordinary income – so, it’s decided by which tax bracket you fall within. Long-term capital gains, which kick in if you’ve owned the property for more than one year, are taxed at a reduced rate. These rates are typically 0, 15, or 20 percent (for context on savings, standard income taxes go up to 37 percent for 2019).
It’s important to note that this tax system applies only to secondary homes – primary residences and rental properties are taxed in a different way.
How do I Minimize Capital Gain Taxes?
No one likes to pay taxes, so now you may be wondering, “Well how do I minimize these capital gains?”
You have a couple of options to help reduce your capital gains taxes:
Redefine the Property’s Status
You can move to your vacation home for a few years. It sounds like we’re telling you to backtrack – you’re trying to sell the home, not live in it! – but hear us out. If you live in the home for two years (we know, we know, it’s such a sacrifice to move to the Cascade Mountains!) then you can declare it as your primary residence.
As a primary residence, the home sale would not be subject to the same tax system as a secondary or vacation home, as residential homes are exempt from capital gains up to a certain amount. If you’re single, you can exclude up to $250,000, while up to $500,000 can be excluded for those married filing jointly. In this way, you can sell the home for a profit (up to a set amount) without facing the same taxes.
Outweigh Gains with Losses
If you’ve experienced long-term capital losses in the same year as when you’d like to sell your vacation home, you can file those losses to help offset any gains you may receive from the home sale. For example, if you have $10,000 in long-term loss from the sale of a personal capital asset and the same year ear $30,000 in long-term gains from the sale of your second home, filing the losses means that you will be taxed on $20,000 worth of capital gains instead.
If the motivation of selling your vacation home comes from other losses, be sure to file correctly so you’re able to make the most of it.
The best way to avoid capital gains? Keep your home! Instead of selling, think about passing it along to another family member; when they inherit it, the home value is reassessed at that time. Should they choose to sell it, there won’t be as much profit and, therefore, less capital gains. Even better, they could choose to occupy the property as a primary residence, meaning that the capital gains tax is circumvented entirely.
Finally, if the motivations to sell come from costs being too high and the capital gains are just an extra stressor, think about ways to cut back on other expenses so that you can keep your vacation home. Are there appliances that can be replaced with newer, more energy efficient models? When you’re not in the home, are you minimizing wasteful use of electricity and water? Every little cent adds up – you’d be surprised how much a few small changes can save you!
There are also a few tax deductions that might help. A mortgage interest, home equity loan, and common property tax deductions can all typically be applied toward vacation homes. There are some stipulations, but as long as the home is truly a secondary residence that is never used to generate income, you’re in the clear.
Preparing to Sell
If you’ve already made up your mind to sell the vacation home, here are some best practices:
Determine When to Sell
Selling a vacation home, like selling any home, requires a bit of planning. Vacation homes should be listed when that area is in peak vacation season. When vacationing families are renting properties for weekend or several-week-long getaways, show them that your property is available for permanent ownership! Let them ride the high of a great family vacation right to your front door.
Working with an Agent
Just because they should be sold during peak tourism season doesn’t mean that you want to spend months at a time at this home – after all, you’re trying to get it sold. This is why working with an agent is incredibly helpful: They know the market your vacation home is in and can be present year round, always ready to show the home to potential buyers.
Cleaning and Staging
You can’t leave everything up to your agent, though. You’ll want to have the home professionally cleaned and, if you can manage, staged. This is the same with any home that is being sold, but keep in mind the appeal of vacation homes: Rooms should highlight maximum relaxation, comfort, and also reference nearby amenities. Select furniture and décor that emphasizes how relaxing your vacation home can be, while still showcasing the easy access to local entertainment.
The Choice is Yours
Whatever your motivations, selling a vacation home can be quite the undertaking. It’s important to take time to familiarize yourself with the process and expectations, and to utilize free resources like NewHomeSource for all the tips and tricks you might need. Happy selling!