The capital gains tax on second homes is the federal tax you owe on the profit when you sell a vacation property, rental, or any dwelling that is not your primary residence. The rate runs from 0% to 20% depending on your income, plus a possible 3.8% surtax on higher earners, for a federal ceiling of 23.8%. Unlike a primary residence, a second home has no $250,000 or $500,000 exclusion to shelter the gain, so the entire profit is taxable unless you use a specific deferral strategy. State tax may add several more percentage points on top.
Federal Rates for 2026
How long you owned the property decides which rate applies. Hold it for one year or less and the profit is a short-term capital gain, taxed at your ordinary income rate, which can reach 37%.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses Hold it longer than a year and the gain qualifies for the lower long-term rates.
For 2026, the long-term capital gains brackets are:2Internal Revenue Service. Revenue Procedure 2025-32
- 0% on taxable income up to $49,450 single, $98,900 married filing jointly, $66,200 head of household.
- 15% above those thresholds up to $545,500 single, $613,700 joint, $579,600 head of household.
- 20% above the upper thresholds.
The gain itself counts toward your taxable income for the year, so a large profit can push you into a higher bracket than you normally sit in. Most second-home sellers land in the 15% tier.
The 3.8% Net Investment Income Tax
Higher earners owe an additional 3.8% surtax on net investment income when modified adjusted gross income exceeds $200,000 (single) or $250,000 (joint).3Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax A second-home sale counts as investment income. The 3.8% applies to the lesser of your net investment income or the amount by which your income exceeds the threshold, reported on Form 8960.4Internal Revenue Service. Instructions for Form 8960 A married couple with $300,000 of income and a $100,000 gain on a lake house owes the surtax on $50,000, the amount over the $250,000 threshold.
Why the Primary Residence Exclusion Does Not Apply
Section 121 lets homeowners exclude up to $250,000 of profit ($500,000 for joint filers) on a home used as their principal residence for at least two of the five years before the sale.5Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence Spending a few weeks or months each year at a vacation property does not satisfy the 24-month test, so the full profit stays taxable.
Calculating the Taxable Gain
You report the sale on Schedule D with Form 8949.6Internal Revenue Service. Property (Basis, Sale of Home, Etc.) 6 The taxable gain is the amount realized from the sale minus your adjusted cost basis. Both figures involve more than the sticker prices at purchase and sale.
Building Your Adjusted Basis
Start with what you paid. Add closing costs from the original purchase: legal fees, title insurance, survey charges, recording fees, and transfer taxes, all listed on the settlement statement.7Internal Revenue Service. Publication 551 – Basis of Assets
Capital improvements also increase basis and directly reduce the taxable gain. Major projects count: a new roof, a kitchen renovation, a finished basement, an added deck. The work must add value or extend the property’s useful life. Routine maintenance like patching drywall or replacing a faucet does not.7Internal Revenue Service. Publication 551 – Basis of Assets Keep every receipt. In an audit, undocumented improvements are worthless.
Reducing the Amount Realized
On the sale side, subtract selling expenses before calculating gain: real estate commissions, advertising, legal fees tied to the sale, and any loan charges you paid on the buyer’s behalf.8Internal Revenue Service. Publication 523, Selling Your Home A 5% commission on a $500,000 sale alone knocks $25,000 off the taxable gain.
A Worked Example
You bought a lake house for $300,000, paid $8,000 in closing costs, and spent $50,000 over the years on a new kitchen and a dock. Adjusted basis: $358,000. You sell for $500,000 and pay $30,000 in commissions and legal fees. Amount realized: $470,000. Taxable gain: $112,000. At 15% long-term, the federal tax runs about $16,800 before state tax or the NIIT.
Basis for Gifted and Inherited Homes
If you inherited the second home, your basis is generally the property’s fair market value on the date the previous owner died, not what they paid.9Internal Revenue Service. Gifts and Inheritances This stepped-up basis can erase decades of appreciation. A parent’s beach house bought for $80,000 in 1990 and worth $400,000 at death gives you a $400,000 basis. Sell for $420,000 and only $20,000 is taxable. Inherited property automatically qualifies for long-term treatment no matter how briefly you held it.
Gifts work the opposite way. You take the donor’s basis, called carryover basis.10Office of the Law Revision Counsel. 26 US Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust The same beach house given during the parent’s lifetime carries the $80,000 basis. Selling for $420,000 would produce a $340,000 taxable gain. Basis can be adjusted upward slightly for any gift tax the donor paid, but not above the property’s fair market value at the time of the gift.
Depreciation Recapture If It Was Ever Rented
A second home that spent any time as a rental carries an extra layer of tax. Depreciation deductions you took (or were allowed to take) while renting are clawed back at up to 25% on the sale, as unrecaptured Section 1250 gain.11eCFR. 26 CFR 1.453-12 – Allocation of Unrecaptured Section 1250 Gain Reported on the Installment Method
Here is where sellers get burned. The IRS bases recapture on the depreciation you were allowed to claim, not what you actually deducted. Rent the home for five years and never claim depreciation, and the IRS still reduces your basis by what you should have deducted.12Internal Revenue Service. Depreciation and Recapture You pay recapture tax on deductions you never took. If you rent a second home even part-time, claim the depreciation each year. The recapture is coming either way.
Recapture is taxed before the remaining long-term gain. On a property with $40,000 of accumulated depreciation and a $150,000 total gain, the first $40,000 is taxed at up to 25% and the remaining $110,000 at your long-term rate.
Strategies to Reduce or Defer the Tax
Partial Conversion to Primary Residence
Moving into the vacation home and living there for two years before selling can unlock part of the Section 121 exclusion, but not all of it. Any period after 2008 during which the property was not your principal residence counts as nonqualified use, and the gain allocated to those years stays taxable.8Internal Revenue Service. Publication 523, Selling Your Home The IRS applies a ratio: nonqualified-use years divided by total ownership years equals the share of gain you cannot exclude.
Suppose you bought a cabin in 2016, used it as a vacation home for eight years, moved in as your primary residence in 2024, and sold in 2026. Total ownership: 10 years. Nonqualified use: 8 years. Eighty percent of the gain stays taxable; 20% is eligible for exclusion. On a $200,000 gain, that means $160,000 is taxed and at most $40,000 is excluded. Useful, but not a full write-off.
Periods that do not count as nonqualified use include qualified extended duty in the military or Foreign Service (up to 10 years) and temporary absences of up to two years total for job changes, health, or unforeseen circumstances.8Internal Revenue Service. Publication 523, Selling Your Home
1031 Like-Kind Exchange
A Section 1031 exchange defers capital gains tax when you swap one investment property for another, as long as both are held for productive use in a business or for investment.13Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment A purely personal vacation home does not qualify, but a second home rented on a meaningful basis can.
Revenue Procedure 2008-16 sets a safe harbor. In each of the two years before the exchange, the property must be rented at fair market rates for at least 14 days, and personal use cannot exceed the greater of 14 days or 10% of the rental days. The same rules apply to the replacement property for the two years after.14Internal Revenue Service. Revenue Procedure 2008-16
Deadlines are strict. You have 45 days from the transfer of the old property to identify replacement properties in writing, and 180 days (or your filing deadline, whichever comes first) to close.13Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment If the 180-day window would run past April 15, file an extension to preserve it. Miss either deadline and the whole exchange fails.
Installment Sale
If getting the full sale price in one year would push you into a higher bracket, an installment sale spreads payments and the gain across multiple years.15Office of the Law Revision Counsel. 26 USC 453 – Installment Method This can hold each year’s income in a lower long-term bracket and cut exposure to the 3.8% NIIT.
One catch: any depreciation recapture from prior rental use must be reported in the year of sale regardless of when payments arrive. Only gain exceeding the recapture amount gets spread out. You also take on the buyer’s credit risk.
What Happens If You Sell at a Loss
Selling a personal-use vacation home for less than you paid does not produce a deductible loss.16Internal Revenue Service. Capital Gains, Losses, and Sale of Home Individual loss deductions are limited to losses from a trade or business, transactions entered into for profit, and certain casualty or theft losses.17Office of the Law Revision Counsel. 26 USC 165 – Losses A vacation home used for personal enjoyment fits none of these. If the property was partly used as a rental, the portion of the loss tied to rental use may be deductible; the personal-use portion is not.
Do Not Forget State Tax
Most states tax capital gains as ordinary income, and top state rates run from 0% in states with no income tax to over 13% in the highest-tax states. About nine states impose no tax on capital gains. Both the property’s location and your state of residence matter, because some states tax real estate gains based on where the property sits regardless of where the seller lives. State income tax paid can be deductible on your federal return within the SALT deduction cap, but there is no federal credit that directly offsets state capital gains tax.