The tax on the sale of a second home falls on the entire profit, because vacation and seasonal properties don’t qualify for the exclusion that shelters up to $250,000 (or $500,000 for joint filers) of gain on a primary residence. If you owned the property more than a year, the gain is taxed at long-term capital gains rates of 0%, 15%, or 20%. Own it a year or less and the gain is taxed as ordinary income, up to 37% in 2026. What you actually owe depends on your adjusted basis, your holding period, whether you ever rented the place, and how it came to you in the first place.
The Rates That Apply
Sell within a year of buying and any profit is a short-term capital gain, taxed at your ordinary income rate.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses Hold longer than a year and the long-term rates kick in. For tax year 2026:2Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
- 0% on taxable income up to $49,450 single, $98,900 married filing jointly.
- 15% from $49,451 to $545,500 single, or $98,901 to $613,700 joint.
- 20% above those upper thresholds.
Most sellers land in the 15% band. On top of the capital gains rate, a 3.8% Net Investment Income Tax applies if your modified adjusted gross income tops $200,000 single or $250,000 joint.3Internal Revenue Service. Topic No. 559, Net Investment Income Tax The surtax hits the lesser of your net investment income or the amount by which your income crosses the threshold. A joint filer with $300,000 in income and a $150,000 gain pays the 3.8% on $50,000, not the full gain.
Calculating the Taxable Gain
The taxable gain is not the sale price minus the purchase price. Two adjustments shrink it: the cost basis grows with certain purchase costs and improvements, and the sale proceeds drop by what you spent to sell.
Adjusted Cost Basis
Start with what you paid. Add settlement costs from the original closing, including recording fees, title insurance, and legal fees.4Internal Revenue Service. Publication 551 – Basis of Assets Then add capital improvements made during ownership: a new roof, an added deck, a kitchen renovation, a septic replacement. Routine maintenance doesn’t qualify. Repainting, fixing a faucet, and swapping broken hardware are all repairs, not improvements. The IRS line is whether the work added value, prolonged the property’s useful life, or adapted it to a new use. Keep receipts and contractor invoices; if your basis is challenged, that paper trail is your only defense.
Selling Expenses
On the sale side, agent commissions, advertising, legal fees at closing, and any loan charges you paid on the buyer’s behalf reduce the amount you’re treated as receiving.5Internal Revenue Service. Publication 523, Selling Your Home On a $400,000 sale, a 5% commission alone knocks $20,000 off.
Worked through: you bought a lake house for $200,000, paid $5,000 in closing costs, and later spent $40,000 on a new kitchen and bathroom. Adjusted basis, $245,000. You sell for $400,000 and pay $25,000 in commissions and legal fees. Amount realized, $375,000. Taxable gain, $130,000.
Why the Primary Residence Exclusion Doesn’t Apply
Section 121 of the Internal Revenue Code lets homeowners shelter up to $250,000 of gain ($500,000 joint) on a principal residence, but the test is strict: you must have owned and lived in the home as your principal residence for at least two of the five years before the sale.6Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence A vacation property almost never meets it. The IRS looks at voter registration, the address on your tax returns, where mail goes, and where you spend the most nights. Weekends and holidays at the beach don’t count. On a pure second home, the entire gain is taxable.
Moving In to Claim the Exclusion
Some owners try to capture the exclusion by moving into the vacation home full-time. It works, but only partially, because of the nonqualified use rules that took effect January 1, 2009.
Any period after that date when the property was not your principal residence counts as nonqualified use. The gain tied to those years cannot be excluded, even after you satisfy the two-out-of-five-year test.6Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence The math is proportional. Own a place ten years (all post-2009), live in it as a primary for the last two, and eight of ten years are nonqualified. Eighty percent of the gain stays taxable regardless of the exclusion; only twenty percent is eligible for the shelter.
Time after you move out doesn’t count as nonqualified use. Live there three years, move away for a year, then sell, and that final year isn’t held against you. The statute also carves out up to ten years of qualifying military service and up to two years for job relocations, health reasons, or unforeseen circumstances. Periods before 2009 are excluded from the calculation entirely.
Selling at a Loss
If the property lost value and you sell for less than your adjusted basis, you cannot deduct the loss. The IRS treats a vacation home as personal-use property, and losses on personal-use assets are not deductible against other income or gains.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses This catches people out because investment-property losses generally are deductible. The exception is a property you rented and reported as investment or business use; a loss there may be deductible. What matters is how the property was classified during ownership, not what you meant it to be.
Inherited or Gifted Second Homes
How you acquired the property changes the tax bill dramatically.
Inherited: Stepped-Up Basis
When you inherit a second home, your basis is generally its fair market value on the date the previous owner died, not what they paid.7Internal Revenue Service. Gifts and Inheritances The step-up can wipe out most of the built-in gain. If a parent bought a cabin decades ago for $80,000 and it was worth $350,000 at their death, your basis starts at $350,000. Sell for $370,000 and only $20,000 is taxable.
Gifted: Carryover Basis
A gift during the donor’s lifetime is far less favorable. Your basis carries over from the donor, meaning what they paid plus any improvements they made.8Office of the Law Revision Counsel. 26 US Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust Same cabin, gifted while the parent is alive: your basis is $80,000, and a $370,000 sale produces a $290,000 gain. Any gift tax the donor paid can raise the basis slightly, but only to the extent it’s attributable to the property’s appreciation.
If You Rented the Property
Rental history changes the sale in two ways.
The 14-Day Rule
Rent the home for fewer than 15 days in a year and you don’t have to report the rental income at all.9Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property The property keeps its personal-use character for that year. Cross the threshold and rental income becomes reportable, with expense tracking to match.
Depreciation Recapture
If you claimed depreciation while renting the property, the IRS takes some of that benefit back at sale. Depreciation you took, or should have taken, on a residential rental is recaptured at a maximum federal rate of 25% as unrecaptured Section 1250 gain.10Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed The recapture is taxed separately from and in addition to the regular capital gains tax on the rest of the profit. The 3.8% NIIT can apply on top if your income clears the thresholds.3Internal Revenue Service. Topic No. 559, Net Investment Income Tax
Here’s the trap: you owe recapture on the depreciation you were allowed to claim, whether you actually claimed it or not. Skipping the deduction during ownership doesn’t save you at sale.
Ways to Defer the Tax
1031 Like-Kind Exchange
A Section 1031 exchange lets you swap one investment property for another without recognizing gain at the time. The replacement must be real property held for investment or business use, identified within 45 days of the sale and closed within 180 days.11Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
A purely personal-use vacation home doesn’t qualify because it isn’t held for investment. An IRS safe harbor gives you a path. Under Revenue Procedure 2008-16, the IRS won’t challenge investment status if, during each of the two years before the exchange, you rented the property at fair market value for at least 14 days and kept your own personal use to no more than 14 days or 10% of the rental days, whichever is greater.12Internal Revenue Service. Revenue Procedure 2008-16 The same usage standards apply to the replacement property for two years after the exchange.
Installment Sale
If you carry financing for the buyer rather than taking the full price at closing, you can report the gain as payments come in. This is an installment sale, and it applies automatically whenever you receive at least one payment after the tax year of the sale.13Internal Revenue Service. Publication 537, Installment Sales Spreading the gain across years can keep you in a lower bracket and potentially below the NIIT thresholds. You report the income on Form 6252 each year you receive a payment. The option isn’t available for a loss sale.
Reporting and Record Keeping
The settlement agent or title company typically reports the gross proceeds to the IRS on Form 1099-S.14Internal Revenue Service. Instructions for Form 1099-S The IRS knows the sale happened, so leaving it off your return invites a notice. You report the transaction on Form 8949, and the totals carry to Schedule D of your Form 1040. The return is due April 15 of the year after the sale.15Internal Revenue Service. When to File
Hold onto every document tied to the purchase, improvements, and sale. The IRS says to keep property records until the period of limitations expires for the year of the disposition, generally three years after you file, or six if you substantially underreported income.16Internal Revenue Service. How Long Should I Keep Records For a real estate transaction of this size, six years is the safer floor.