To report the sale of a vacation home on your tax return, you file Form 8949 and carry the totals to Schedule D. If you ever rented the property and claimed (or could have claimed) depreciation, add Form 4797 to handle the recapture. Collect rent during the year of sale? Schedule E covers that income through the closing date. High earners add Form 8960 for the 3.8% net investment income tax, and sellers taking payment over multiple years use Form 6252. Which combination applies to you depends on how the property was used, so the first job is figuring the gain correctly.
Figure the Gain Before You Touch a Form
Your taxable gain is the amount realized minus your adjusted basis. The amount realized is the gross sale price reduced by selling costs like real estate commissions, advertising, attorney fees, and closing costs. Sell for $600,000, pay $40,000 in selling costs, and your amount realized is $560,000.
Adjusted basis starts with the original purchase price plus closing costs you paid when you bought (title insurance, attorney fees, recording fees, transfer taxes). Add capital improvements made during ownership — a new roof, kitchen remodel, added bathroom. Routine maintenance and repainting don’t qualify.
Then subtract depreciation. If you ever rented the property, you must reduce basis by the total depreciation that was allowed or allowable, whichever is larger.1Internal Revenue Service. Publication 946 (2025), How To Depreciate Property This rule is where owners most often go wrong: skipping depreciation on past returns doesn’t let you off the hook at sale. The IRS still reduces your basis as though you had claimed it.2Internal Revenue Service. Depreciation and Recapture 3
Formula: original cost + capital improvements − depreciation allowed or allowable = adjusted basis.
Holding Period Sets the Rate
Owned for one year or less, the gain is short-term and taxed at ordinary income rates. More than a year, it’s long-term and taxed at 0%, 15%, or 20% depending on your taxable income and filing status.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses For 2026, the 15% rate starts at $49,450 for single filers and $98,900 for joint filers; the 20% rate applies above $545,500 single and $613,700 joint.
Depreciation Recapture Gets Its Own Rate
The slice of gain equal to depreciation taken or allowable during rental periods is unrecaptured Section 1250 gain, taxed at a maximum federal rate of 25%.4Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed – Section: Unrecaptured Section 1250 Gain Only the remaining gain qualifies for the regular long-term rate. On a $150,000 gain with $40,000 of depreciation, the first $40,000 is taxed at up to 25% and the other $110,000 at your applicable long-term rate.
Losses have their own rules. A loss on a purely personal-use vacation home isn’t deductible. If part of the property’s use was rental or investment, the loss attributable to that portion is deductible, first against capital gains and then up to $3,000 against ordinary income ($1,500 if married filing separately), with the remainder carrying forward.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Form 8949 and Schedule D: The Baseline Report
Form 8949 is where you list the sale itself: property description, acquisition date, sale date, gross proceeds, and adjusted basis.5Internal Revenue Service. Instructions for Form 8949 (2025) Short-term transactions go in Part I; long-term in Part II. If the property had mixed personal and rental use, you may need to split the sale into separate lines — one for the personal portion, one for the rental portion.
Totals from Form 8949 flow to Schedule D, which combines them with your other capital transactions for the year and produces the net gain or loss that lands on Form 1040.6Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets For a vacation home that was never rented, Form 8949 and Schedule D are the whole story.
Form 4797: Depreciation Recapture
If you claimed depreciation during rental periods, Part III of Form 4797 calculates how much of your gain is recaptured.7Internal Revenue Service. Instructions for Form 4797 (2025) For a vacation home rented as an investment, that recaptured amount is taxed at the 25% maximum; gain beyond the recapture goes on Form 8949 and Schedule D at long-term capital gains rates.
If your rental activity rose to the level of a trade or business, the entire rental portion of the sale may be reported on Form 4797 rather than split between forms.8Internal Revenue Service. Sale or Trade of Business, Depreciation, Rentals The practical takeaway: if depreciation ever appeared on a past Schedule E for this property, expect Form 4797 to be part of your filing.
Schedule E: Rent Collected in the Year of Sale
Collected any rent during the year you sold? Report that income and the related expenses on Schedule E, running up through the sale date.9Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss That includes the final partial-year depreciation deduction. Schedule E flows to Form 1040 on its own line, separate from the capital gain reported through Schedule D.
One wrinkle worth flagging: if you rented the home for fewer than 15 days in the year, that rental income is excluded from gross income and no rental expenses are deducted, so Schedule E stays out of the picture.10Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc. The sale is still reported on Form 8949 and Schedule D as a personal-use property, which also means any loss is nondeductible.
Mixed-Use Allocation
For years the property was both rented at fair market value and personally used, expenses had to be allocated based on days in each use. Days rented below market rate counted as personal use. The rental share went to Schedule E; the personal share of mortgage interest and property taxes may have gone to Schedule A if you itemized. If personal use exceeded the greater of 14 days or 10% of fair-rental days, rental deductions were capped at rental income — no net loss allowed, and unused depreciation carried forward to reduce basis at sale.10Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc. All of that history affects the basis figure you plug into Form 8949.
Form 6252: Installment Sales
If the buyer is paying over multiple years instead of a single lump sum, you generally report the gain using the installment method on Form 6252.11Internal Revenue Service. Publication 537 (2025), Installment Sales Each year a payment comes in, you recognize a proportional share of the total gain, which can keep you from spiking into a higher bracket in a single year.
You can elect out of the installment method and recognize the entire gain in the year of sale, but the installment method isn’t available on a loss sale.12Internal Revenue Service. About Form 6252, Installment Sale Income
Form 8960: Net Investment Income Tax
High-income sellers owe an additional 3.8% net investment income tax on top of the capital gains tax. It kicks in when modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately), and applies to the lesser of your net investment income or the excess MAGI over the threshold.13Internal Revenue Service. Topic No. 559, Net Investment Income Tax Capital gain from a vacation home counts as net investment income.
You report the surtax on Form 8960, with the vacation home gain going on Line 5a.14Internal Revenue Service. Instructions for Form 8960 The thresholds aren’t indexed for inflation. A married couple with $280,000 of regular income and a $200,000 vacation home gain owes 3.8% on the amount by which their combined income exceeds $250,000 — an extra $8,740 on top of the capital gains tax.
State income tax is a separate matter. Most states tax capital gains as ordinary income, with rates from zero in no-income-tax states to over 13% in the highest. Your state of residence generally governs, though some states also tax nonresidents on real estate sold within their borders.
FIRPTA Withholding for Foreign Sellers
If you’re a non-resident alien or foreign entity selling U.S. real property, the buyer is generally required to withhold 15% of the gross sale price under the Foreign Investment in Real Property Tax Act.15Internal Revenue Service. FIRPTA Withholding This is a prepayment, not a separate tax. You claim it against your actual liability when you file a U.S. return, and any excess comes back as a refund. Reduced withholding is available by applying to the IRS before closing.
Pay Estimated Tax in the Quarter of the Sale
A large capital gain can create a tax bill your regular withholding won’t cover. If you expect to owe $1,000 or more after withholding and credits, you generally need to make an estimated payment to avoid an underpayment penalty.16Internal Revenue Service. Large Gains, Lump Sum Distributions, Etc. The IRS charges 7% interest on underpayments as of early 2026.17Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
You don’t owe the whole tax the day the sale closes. Increase your estimated payment for the quarter when the sale happened. The annualized income method on Schedule AI of Form 2210 lets you match payments to when the income actually hit. If you have W-2 wages, bumping up federal withholding for the rest of the year is another way to close the gap.
What It Costs to Get It Wrong
The IRS imposes a 20% accuracy-related penalty for underpayments caused by substantial understatement of income tax or negligent disregard of the rules.18Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments For a vacation home with years of rental history, missing depreciation recapture is the classic trigger. The penalty rises to 40% for gross valuation misstatements.
File on time but underpay, and the failure-to-pay penalty is 0.5% of the unpaid balance per month, capped at 25%.19Internal Revenue Service. Failure to Pay Penalty That rate drops to 0.25% per month with an approved payment plan. Interest compounds on top. On a six-figure gain, the stacked penalties and interest add up fast, which is why dialing in the estimated payment the quarter you close is worth the time.