What Expenses Are Deductible When Selling a Second Home?

When you sell a second home, two categories of expense directly reduce the profit the IRS can tax: the costs you pay to close the sale, and the capital improvements you made while you owned the property. Prorated property taxes at closing give you a separate deduction on Schedule A if you itemize. Unlike a primary residence, a second home gets no automatic exclusion of gain, so the deductible expenses when selling a second home carry more weight — every legitimate cost you can document lowers a tax bill that would otherwise apply to the full profit.¹

Selling Costs That Come Off Your Sale Price

The number on your sale contract is not the number the IRS taxes. Federal regulations let you subtract the expenses of selling from the gross proceeds to arrive at your “amount realized,” which is the figure that actually drives your gain calculation.² The IRS treats the following as selling expenses:³

Real estate commissions, usually the single largest selling cost
Advertising and staging fees to market the property or prepare it for showings
Legal fees for reviewing the contract, drafting the deed, or attending closing
Title insurance premiums on the policy you provide the buyer
State or local transfer taxes on the change of ownership
Recording fees charged by the government to record the new deed
Escrow and settlement charges paid to the closing agent
Loan charges you agreed to pay on the buyer’s behalf, such as points or loan fees that would ordinarily be theirs

If your second home sells for $500,000 and closing costs total $35,000, your amount realized drops to $465,000 before you even factor in your basis. Every line on the closing statement matters, so keep an itemized copy and cross-check each fee against the list above.

Capital Improvements That Raise Your Cost Basis

Your cost basis starts with what you originally paid, including certain purchase-side closing costs. Federal law then adjusts that basis upward for any expenditure properly chargeable to a capital account, meaning a permanent improvement to the property.⁴ A higher basis produces a smaller taxable gain.

The IRS separates improvements from repairs. Improvements add value, extend the home’s useful life, or adapt it to a new use. A new roof, an added bathroom, a full window replacement with energy-efficient units, a finished basement, an electrical upgrade, or a new swimming pool all qualify. Repairs simply keep the home in its current condition. Fixing a leaky faucet, patching drywall, repainting a room, or replacing a single broken window pane count as maintenance and do not adjust your basis.

The math is straightforward. Buy a vacation home for $300,000, spend $50,000 on a new kitchen and $15,000 on a new roof, and your adjusted basis is $365,000. When you sell, your gain is measured against that figure, not the original purchase price. Save every receipt showing the date, the amount, and a description of the work, because the burden of proving basis falls on you if the IRS asks.

Prorated Property Taxes at Closing

At closing, property taxes are typically split between you and the buyer based on how many days each of you owned the home during the tax year. For federal tax purposes, you are treated as paying the property taxes up to (but not including) the date of sale, regardless of how local law assigns the lien.⁵ Your prorated share is deductible on your return for the year of sale if you itemize. This deduction goes on Schedule A and is separate from the selling-expense reduction. It does not lower your amount realized; it lowers your taxable income directly.

If You Ever Rented the Property, Watch Depreciation Recapture

Renting out a second home, even for part of a year, changes the math when you sell. You were required to depreciate the property on your rental-year returns, and when you sell, the IRS recaptures that depreciation at a rate of up to 25 percent — higher than the long-term capital gains rate most sellers pay on the rest of the profit.⁶ This is called unrecaptured Section 1250 gain.⁷

If you claimed $40,000 in depreciation over several rental years, that $40,000 portion of your gain is taxed at up to 25 percent, and the rest of the gain falls under the ordinary long-term rates. One trap catches many sellers: even if you did not actually claim depreciation you were entitled to, the IRS still requires you to reduce your basis by the amount you were allowed to take. The recapture portion is reported on Form 4797, not Form 8949.⁸

Records You Need to Keep

Every deduction on this page depends on documentation. Three sets of records do the work.

First, the original closing disclosure or HUD-1 from when you bought the property. That document establishes your starting basis and captures any purchase-side closing costs that add to it.

Second, receipts and invoices for every capital improvement, each showing the date, the amount paid, and a description of the work. Without these, you cannot defend the basis adjustments a kitchen, roof, or addition earned you.

Third, the closing statement from the sale itself, which documents every selling expense on the itemized list above.

The IRS generally requires taxpayers to keep tax records for at least three years after filing, but for property records the agency advises keeping them until the statute of limitations expires for the year you dispose of the property.⁹ In practice, save everything about the property from purchase through at least three years after you file the return reporting the sale.

Where These Deductions Land on Your Return

The closing agent typically files Form 1099-S with the IRS reporting the gross proceeds from your sale.¹⁰ You report the transaction on Form 8949, entering the date you acquired the property, the date you sold, the gross proceeds, and your adjusted basis. The selling expenses either reduce the proceeds you enter or are shown as an adjustment, and the capital improvements are already baked into the basis figure. The difference is your gain. Totals from Form 8949 flow to Schedule D of your Form 1040.¹¹

If any of the gain reflects prior depreciation from renting the property, that portion is reported on Form 4797 rather than Form 8949.⁸ Prorated property taxes go on Schedule A if you itemize. Before you file, compare the gross proceeds on your 1099-S against your closing statement line by line; the IRS matches those numbers, and any mismatch invites a notice.

One Boundary Worth Naming

The Section 121 exclusion that shields up to $250,000 of gain ($500,000 for married couples filing jointly) applies only to a principal residence you owned and used as your main home for at least two of the five years before the sale.¹ A vacation cabin, beach condo, or any property that was not your main home does not qualify, no matter how long you owned it. That is precisely why the selling costs, capital improvements, and prorated tax deduction covered here carry more weight for a second home than for a primary residence: they are the main levers you have to reduce a fully taxable gain.

1
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
2
eCFR. 26 CFR 1.1001-1 – Computation of Gain or Loss
3
Internal Revenue Service. Publication 523, Selling Your Home
4
Office of the Law Revision Counsel. 26 USC 1016 – Adjustments to Basis
5
Internal Revenue Service. Publication 530, Tax Information for Homeowners
6
Internal Revenue Service. Property (Basis, Sale of Home, Etc.) 5
7
Office of the Law Revision Counsel. 26 USC 1(h) – Maximum Capital Gains Rate
8
Internal Revenue Service. Instructions for Form 4797
9
Internal Revenue Service. How Long Should I Keep Records?
10
Internal Revenue Service. About Form 1099-S, Proceeds From Real Estate Transactions
11
Internal Revenue Service. Instructions for Form 8949