Taxes When Selling a Second Home

Gain on a personal second home is capital gain with no exclusion

The Schedule D instructions say gain from the sale of a capital asset held for personal use is a capital gain, reported on Form 8949. Your gain is the amount realized, the price less selling expenses, minus your adjusted basis, which is your purchase cost plus capital improvements; the closing costs page lists which seller charges count.

For 2026, Rev. Proc. 2025-32 sets the 0 percent long-term rate through $98,900 of taxable income on a joint return and $49,450 single, and the 15 percent rate through $613,700 joint and $545,500 single, with 20 percent above. Section 1411 includes net gain from the disposition of property not held in a trade or business in net investment income, so the 3.8 percent tax applies above $250,000 of modified AGI joint or $200,000 single.

Section 121 excludes gain only on a home owned and used as your principal residence for periods totaling two years in the five years before the sale. A vacation or second home does not qualify, however many years you used it.

A loss on a second home is not deductible

Section 165(c) limits an individual's losses to those from a trade or business, a transaction entered into for profit, and casualty or theft. A home held for personal enjoyment is none of these, and the Schedule D instructions say a loss from the sale of a capital asset held for personal use is not deductible.

You still report the sale if you receive a Form 1099-S. The Form 8949 instructions say to report the transaction and enter the nondeductible loss as a positive adjustment in column (g) with code L, so the net result is zero.

Renting the house before selling does not create a deductible loss from earlier declines. Publication 527 sets the basis of property changed to rental use at the lower of its fair market value or adjusted basis on the date of conversion, so only decline after conversion can produce a loss.

A worked example: a lake house bought in 2012 and sold in 2026

Hypothetical, round numbers. A married couple bought a lake house in 2012 for $400,000 and added $50,000 of improvements. They sell in 2026 for $900,000 and pay $50,000 in commissions and closing costs, so the amount realized is $850,000 and the gain is $400,000.

Their other taxable income is $300,000. The gain stacks on top: $313,700 falls under the $613,700 joint ceiling and is taxed at 15 percent, about $47,100, and the remaining $86,300 at 20 percent, about $17,300. Modified AGI exceeds $250,000 by more than the gain, so the 3.8 percent tax applies to the full $400,000, about $15,200. Federal tax is roughly $79,600 before any state tax.

If the house had sold for $350,000 instead, the $100,000 loss would produce no deduction. Run your own numbers with your CPA, and see the capital gains rates page for how the brackets stack.

Moving in first helps less than many owners expect

If you make the second home your main residence for two years, section 121 can apply, but section 121(b)(5) excludes gain allocated to periods of nonqualified use. A period of nonqualified use is any time after December 31, 2008 when the property was not used as the principal residence of you or your spouse, with exceptions that include time after you move out within the five-year window.

The gain is allocated by time. If you owned the house as a second home from 2016 to 2024 and then lived in it for two years, eight of ten years are nonqualified use, so 80 percent of the gain stays taxable even though you meet the two-year test. The section 121 versus 1031 guide compares this with the exchange route.

Converting to a rental opens the exchange route

Section 1031 covers only real property held for productive use in a trade or business or for investment, so a house held for personal use cannot be exchanged. Rev. Proc. 2008-16 gives a safe harbor for a dwelling: own it for at least 24 months before the exchange, and in each of the two 12-month periods rent it at a fair rental for 14 days or more and keep personal use to the greater of 14 days or 10 percent of the fair-rental days.

Once it qualifies, the gain can be deferred into other real estate, including passive interests in a Delaware statutory trust; see can a second home be exchanged and the capital gains on a vacation rental page for the mixed-use math. Depreciation claimed during the rental years is recaptured at up to 25 percent on a later taxable sale.