Vacation Property Walkthrough: Selling a Vacation Property

Even if you’ve enjoyed your vacation home for years, there may come a time when you’re ready to sell – for personal and/or financial reasons. Because there are tax implications, planning ahead and good record keeping are two practices that can help you limit potentially costly errors when it comes time to sell your vacation home. Pay special attention to the tax rules for capital gains and 1031 exchanges.

Capital Gains

To claim the capital gains exemption, you must make the vacation property a primary residence for at least two years – otherwise, you’ll owe taxes on any profit from the sale. Essentially, the sale is treated the same way as if you sold stock. If you owned the home for more than 18 months, the profit is considered a long-term capital gain, and if you owned it for less than 18 months, it’s considered a short-term gain.

Certain expenses can be added to your cost basis when determining capital gains – including the money you spent on improvements. It’s important to keep excellent records of the expenses associated with the home – doing so can save you a lot of money. (For related reading, see: Avoid Capital Gains Tax on Your Home Sale.)

1031 Exchanges

A 1031 exchange, also known as a like-kind exchange or tax-deferred exchange, is a transaction where a seller swaps a rental or investment property for another rental or investment property of equal or greater value, on a tax-deferred basis. The advantage is that you may be able to avoid paying capital gains tax on the exchange. A property must be considered a rental property (and not a personal residence) to qualify for a 1031 exchange – which means you must rent out the property for 15 days or more and use it for less than 14 days or 10% of days the home was rented. (See also: 10 Things to Know About 1031 Exchanges.) Note that these exchanges were preserved for real estate (not, for example, artworks)  in the 2017 tax legislation.

Rental Potential

If your vacation home has been used as a rental, a solid rental history can really boost the home's value and marketability. Again, it pays to keep accurate records. Many real estate markets are flooded with vacation properties. The homes may be comparable and offer similar amenities, but the one with a strong rental history will likely sell for more money. (For more, see: How to Prevent a Tax Hit When Selling a Rental Property.)