What Capital Gains Tax Do You Pay on a Second Home?

Selling a second home means paying federal capital gains tax on the profit, and the rate is 0%, 15%, or 20% depending on your total taxable income for the year. A second home does not get the automatic gain exclusion that a primary residence does, so the full profit is generally on the table. If you ever rented the property out, part of the gain can be taxed at up to 25% under the depreciation recapture rules, and higher earners owe an extra 3.8% on top. The capital gains tax on a second home is what the rest of this article walks through, along with the moves that can shrink or defer the bill.

How the Rate Is Set

Holding period comes first. Own the property one year or less and the gain is short-term, taxed at your ordinary income rate, which climbs as high as 37%. Own it more than a year and the gain is long-term, taxed at the preferential rates.¹

Most second-home sellers land in long-term territory. For 2026, the long-term brackets are:²

0% on taxable income up to $49,450 single, $98,900 married filing jointly.
15% on taxable income from $49,451 to $545,500 single, or $98,901 to $613,700 married filing jointly.
20% on taxable income above $545,500 single or $613,700 married filing jointly.

The gain counts toward the income that sets your bracket, so a large sale can push you from 15% into 20% for the portion above the threshold. The brackets apply to total taxable income for the year, not to the gain by itself.

Figuring the Taxable Gain

The taxable gain is not simply sale price minus purchase price. Start with your original purchase price from the closing statement, then add the costs you paid when buying, such as title insurance, legal fees, and recording fees. Add the cost of any capital improvements made during ownership. That total is your adjusted basis.

Capital improvements are permanent changes that add value or extend the property’s useful life: a new roof, a kitchen renovation, an added bathroom, a replaced HVAC system. Routine maintenance and minor repairs do not count. Every dollar of legitimate improvement cost reduces your taxable gain by a dollar, so the receipts matter.

Keep the file: contractor invoices, permits, closing documents. If the IRS questions your basis, records are what defend it. The arithmetic itself is simple. Sale price, minus selling costs, minus adjusted basis, equals your gain. Sellers most often lose money by failing to document improvements made years earlier.

Depreciation Recapture If You Ever Rented It Out

Renting the property at any point changes the math. If you claimed depreciation deductions (or were entitled to claim them) against rental income, the IRS wants that benefit back at sale. The depreciation portion of the gain is taxed at a maximum rate of 25%, regardless of your income bracket.³ This is called unrecaptured Section 1250 gain.

An example makes it concrete. You bought a rental for $300,000 and claimed $50,000 in depreciation over the years. Your adjusted basis is now $250,000. Sell for $400,000 and the total gain is $150,000. The first $50,000 (the depreciation) is taxed at up to 25%. The remaining $100,000 is taxed at your long-term rate of 0%, 15%, or 20%.

Skipping the depreciation deduction each year does not spare you. The tax applies to depreciation “allowed or allowable,” meaning the amount you should have deducted even if you didn’t.⁴ The only way to limit recapture to what you actually deducted is to prove with adequate records that you claimed less than you were entitled to.⁵

The 3.8% Surtax for Higher Earners

Sellers with modified adjusted gross income above $200,000 single or $250,000 married filing jointly owe an additional 3.8% Net Investment Income Tax on top of the capital gains rate.⁶ The tax applies to the lesser of your net investment income or the amount by which income exceeds the threshold.⁷

These thresholds are not adjusted for inflation, so more sellers cross them each year. A seller already in the 20% long-term bracket who also owes this surtax faces an effective federal rate of 23.8% before depreciation recapture or state taxes enter the picture. A large gain can push income across the threshold on its own, even when wages alone would not.

Ways to Reduce or Defer the Tax

Convert to a Primary Residence for the Section 121 Exclusion

Section 121 lets you exclude up to $250,000 of gain (or $500,000 married filing jointly) on the sale of your main home.⁸ Second homes are not eligible by default, but you can convert one by owning and living in it as your main residence for at least two of the five years before sale.

The catch is nonqualified use. Any time you used the property as a second home or rental after January 1, 2009, counts as nonqualified use, and the corresponding share of the gain cannot be excluded.⁸ The formula divides years of nonqualified use by total years of ownership. Own a vacation home for eight years, use it as a vacation home for four, then live in it as your primary residence for four, and roughly half of the gain stays taxable.

One favorable wrinkle: time after your last day using the property as your principal residence does not count as nonqualified use. And even when the exclusion applies, depreciation claimed after May 6, 1997 stays subject to the 25% recapture rate.⁴

If a job move, health issue, or unforeseen event prevents you from hitting the full two years, a prorated exclusion may still be available. The IRS recognizes job changes where the new workplace is at least 50 miles farther away, medical moves, divorce, and qualifying emergencies such as natural disasters or multiple births. The exclusion scales to how much of the two-year requirement you met.

1031 Exchange If the Property Is an Investment

A second home held for investment, such as a rental, can be exchanged for another investment property under Section 1031, deferring the entire capital gains tax.⁹ “Defer” is the operative word. The tax rolls into the replacement property’s basis and comes due when you eventually sell without another exchange.

The rules are tight. You have 45 days after selling to identify potential replacement properties in writing, and 180 days to close on the replacement, though that deadline can’t run past the due date (with extensions) of your return for the year of sale.¹⁰ Only a presidentially declared disaster extends those windows. You cannot touch the sale proceeds; a qualified intermediary must hold the funds between transactions.

A purely personal vacation home used only by you generally does not qualify, because the statute requires the property to be held for investment or productive business use. Property held primarily for resale is excluded, and U.S. and foreign real property are not like-kind to each other.⁹

Installment Sale to Spread the Tax Across Years

Financing the sale yourself lets you spread the tax bill over multiple years using the installment method.¹¹ An installment sale is one where at least one payment arrives after the tax year in which the sale occurs. Gain is recognized proportionally as payments come in, rather than all at once.

Each payment breaks into three pieces: a tax-free return of basis, taxable gain, and interest income taxed as ordinary income. Installment income is reported on Form 6252 each year you receive a payment.¹² One important limit: depreciation recapture must be reported in full in the year of sale, no matter when payments arrive.

If You Inherited the Home

Inheriting a second home changes the picture completely. Under federal law, inherited property receives a stepped-up basis equal to its fair market value on the date the previous owner died.¹³ Appreciation that occurred during the original owner’s lifetime is effectively erased for capital gains purposes.

If a parent bought a beach house for $150,000 and it was worth $500,000 at death, your basis is $500,000. Sell for $520,000 and the taxable gain is $20,000. Inherited property is also treated as long-term automatically, regardless of how briefly you held it, so the preferential rates apply even to a quick sale.

Stepped-up basis does not apply to property received as a gift during the owner’s lifetime. Gifted property carries over the original owner’s basis, which usually produces a much larger taxable gain at sale. On a single property, that distinction can be worth tens of thousands of dollars.

State Taxes and Nonresident Withholding

Federal is not the whole bill. Most states tax capital gains as ordinary income, and rates vary widely. A few states have no income tax, but many tax investment gains at rates that can exceed 10%. A seller in a high-tax state can face a combined federal and state rate above 33% before depreciation recapture or the net investment income surtax.

Some states also require the buyer to withhold a percentage of the sale price when the seller is a nonresident, which acts as an advance tax payment. If your second home is in a different state from where you live, check that state’s withholding rules well before closing. The withheld amount is credited against your state tax when you file a nonresident return; getting a refund requires filing that return.

Reporting and Paying

Report the sale on Form 8949, listing acquisition date, sale date, sale price, and adjusted basis.¹⁴ The totals flow to Schedule D of Form 1040. If the property was a rental with depreciation recapture, Form 4797 may also apply.⁴

A second-home sale often produces a tax bill much larger than paycheck withholding covers, which is where underpayment penalties come in. The IRS generally waives the penalty if you owe less than $1,000 after withholding and credits, or if you paid at least 90% of the current year’s total tax.¹⁵ Paying 100% of the prior year’s tax also avoids the penalty, rising to 110% if your prior-year adjusted gross income exceeded $150,000.

For most sellers, the safest move is an estimated tax payment in the quarter when the sale closes, made through IRS Direct Pay or the Electronic Federal Tax Payment System. Waiting until April to confront a six-figure bill is how estimated tax penalties accumulate, because by then the quarterly deadlines have already gone by.

1
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
2
Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
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Internal Revenue Service. Property (Basis, Sale of Home, Etc.) 5
4
Internal Revenue Service. Sale or Trade of Business, Depreciation, Rentals
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Internal Revenue Service. Publication 527, Residential Rental Property
6
Office of the Law Revision Counsel. 26 US Code 1411 – Imposition of Tax
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Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
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Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
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Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
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Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
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Office of the Law Revision Counsel. 26 USC 453 – Installment Method
12
Internal Revenue Service. About Form 6252, Installment Sale Income
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Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
14
Internal Revenue Service. Instructions for Form 8949, Sales and Other Dispositions of Capital Assets
15
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty