Tax Consequences of Selling a Second Home: Reporting, Exclusions, and Calculations

Overview

Selling a second home (a property you do not use as your primary residence) usually produces capital gain or loss that must be reported to the IRS. Unlike sales of a primary home that may qualify for the Section 121 exclusion, second homes are treated as capital assets and are subject to long‑ or short‑term capital gains rules depending on how long you held the property. This article explains how to calculate taxable gain, which tax rules commonly apply, special situations (rental conversions, depreciation, 1031 exchanges, foreign sellers), state tax issues, and practical recordkeeping tips. Content is current as of 2025. For tailored advice, consult a tax professional or CPA.

How to determine whether you owe tax

• Holding period: If you owned the home for more than 12 months, any gain is long‑term and taxed at long‑term capital gains rates (0%, 15%, or 20% depending on taxable income). Short‑term gains (owned 12 months or less) are taxed at ordinary income rates. Also check Net Investment Income Tax (NIIT) of 3.8% for high‑income taxpayers.
• Reporting: Report the sale on Form 8949 and Schedule D (Form 1040); the gross amount and amounts realized are shown, then adjustments (basis, selling expenses) produce the gain (IRS Form 8949 and Schedule D instructions).

Step‑by‑step: calculate gain or loss

1. Compute your adjusted basis

• Starting point: purchase price.
• Add: capital improvements that add value or prolong useful life (room additions, new roof, new HVAC). Do not include ordinary repairs. Keep receipts.
• Add: certain acquisition costs (survey, recording fees, title insurance may be added). Many closing costs (loan fees, mortgage interest) are not part of basis.
• Subtract: depreciation claimed for periods the property was used in a trade or business or as a rental (even if you later converted it). Depreciation reduces basis and is subject to recapture rules.
• Subtract: casualty losses claimed.

1. Determine amount realized

• Gross sales price minus selling expenses (real estate commissions, advertising, legal fees, escrow fees). Mortgage payoff is not a selling cost for tax calculation.

1. Gain (or loss) = Amount realized − Adjusted basis

2. Apply tax rules

• If gain is long‑term, apply federal capital gains rates. Also evaluate NIIT applicability.
• If depreciation was taken, part of your gain may be taxed as depreciation recapture (see below).
• If you converted the property to rental use—or vice versa—there are special limits on any Section 121 exclusion and complex allocation rules for personal vs. business use.

Example

• Purchased: $200,000
• Improvements (capital): $30,000
• Depreciation claimed: $10,000 (for periods it was rented)
• Adjusted basis = $200,000 + $30,000 − $10,000 = $220,000
• Sold for $320,000 with $20,000 in selling costs → Amount realized = $300,000
• Gain = $300,000 − $220,000 = $80,000

Tax treatment: up to $10,000 of that gain may be attributable to depreciation and subject to recapture rules; the remaining $70,000 is a capital gain taxed at long‑term rates (plus NIIT if applicable).

Key special rules and exceptions

Section 121 (Primary residence exclusion)

• The Section 121 exclusion (up to $250,000 for single filers, $500,000 for married filing jointly) generally applies only to a sale of a primary residence where you owned and used the home as your main home for at least 2 of the last 5 years before the sale (IRS Publication 523). A second home usually won’t qualify unless you convert it to your primary residence and meet the timing and use tests.
• Nonqualified use rules (post‑2008 periods of nonqualified use) can limit the exclusion if the home was used as a rental or investment before becoming your primary residence.

Depreciation recapture (unrecaptured Section 1250 gain)

• If you claimed depreciation while the property was used in a rental or business, the IRS requires you to “recapture” that depreciation when you sell. For residential real property this generally results in up to 25% tax on the portion of gain attributable to depreciation (the “unrecaptured Section 1250 gain”). See IRS Publication 544 and the instructions for Schedule D.
• You must report depreciation recapture even if you otherwise qualify for Section 121 on portions of the sale.

1031 exchanges (tax‑deferral option)

• Like‑kind exchanges under IRC Section 1031 allow deferral of gain when you exchange real property held for productive use in a trade or business or for investment for like‑kind property. Important: after the Tax Cuts and Jobs Act of 2017, 1031 deferral applies only to real property; personal property like vehicles is ineligible. A second home used for personal purposes is not eligible unless it has been converted to investment property and you follow the strict 1031 timeline and rules (identify replacement within 45 days, acquire within 180 days, use a qualified intermediary). See IRS guidance on like‑kind exchanges.

Rental conversions and partial exclusions

• If you rented the second home, you may need to reduce the basis by depreciation claimed and may have limited or no access to the Section 121 exclusion depending on the timing and amount of personal use. Allocation of gain between personal and rental use, and between periods of qualified/nonqualified use, can be complex—document dates of rental, personal use, and conversions.

Installment sales

• You may be able to spread gain recognition over time by using an installment sale (report gain as you receive payments). This can reduce tax in high‑income years but has limits—for example, cannot defer depreciation recapture tax. See IRS Publication 537 for installment sale rules.

FIRPTA (foreign sellers)

• If the seller is a nonresident alien or foreign entity, the buyer generally must withhold a percentage of the sales price under the Foreign Investment in Real Property Tax Act (FIRPTA). For current rates and thresholds see the IRS FIRPTA guidance. Foreign sellers should consult their tax advisor because withholding can be large and refundable after filing a U.S. tax return.

State and local taxes

• Capital gains may be subject to state income tax; state rates, definitions of basis, and exclusions vary. Also consider local transfer taxes and recording fees that affect net proceeds.

Common mistakes to avoid

• Failing to keep records of improvements and acquisition costs. Without proof, you can’t increase basis.
• Forgetting depreciation recapture after renting the property.
• Assuming Section 121 applies to a second home without meeting ownership/use tests.
• Missing withholding obligations for foreign sellers (FIRPTA) or not applying for reduced withholding when appropriate.

Recordkeeping checklist

• Closing statements from purchase and sale (HUD‑1 or Closing Disclosure)
• Receipts and invoices for capital improvements
• Records of rental income and depreciation schedules (Form 4562)
• Dates of personal use and rental use (calendar, bookings)
• Real estate commission statements and settlement statements

When to consider professional help

• You claimed depreciation as a landlord at any time—recapture rules are complex.
• You plan to use a 1031 exchange or an installment sale.
• Foreign ownership is involved (FIRPTA withholding) or you changed state residency around the sale.
• The gain is large and timing or bunching strategies (selling in low‑income year, charitable remainder trust, timing improvements) could materially reduce tax.

Useful internal resources

• For more on capital gains basics, see FinHelp’s guide to Capital Gains (https://finhelp.io/glossary/capital-gains/).
• To explore 1031 exchange mechanics and timeline, read FinHelp’s 1031 Exchange overview (https://finhelp.io/glossary/1031-exchange/).
• If you’re comparing selling a primary home vs. a second home, FinHelp’s article on The Tax Consequences of Selling Your Primary Residence explains Section 121 specifics (https://finhelp.io/glossary/the-tax-consequences-of-selling-your-primary-residence/).

Authoritative sources and further reading

• IRS Publication 523, Selling Your Home (Section 121 rules and exclusions): https://www.irs.gov/pub/irs-pdf/p523.pdf
• IRS instructions for Form 8949 and Schedule D (reporting sales of capital assets): https://www.irs.gov/forms-pubs/about-form-8949 and https://www.irs.gov/forms-pubs/about-schedule-d
• IRS Like‑Kind Exchanges (Section 1031): https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-center
• IRS FIRPTA information (withholding rules for foreign sellers): https://www.irs.gov/individuals/international-taxpayers/withholding-of-tax-on-dispositions-of-us-real-property-interests

Professional disclaimer

This article provides general information about federal tax rules and common planning considerations for selling a second home. It is not a substitute for personalized tax, legal, or financial advice. Tax rules can change and state rules differ; consult a qualified tax professional or CPA to evaluate your specific facts and prepare tax filings.

Final takeaway

A second home sale can be straightforward or tax‑complex depending on rental history, depreciation, conversion to primary residence, and whether you reinvest proceeds through a 1031 exchange. Accurate recordkeeping, early planning, and professional review are the simplest ways to avoid surprises and minimize tax.