What is capital gains tax for a secondary home?

You achieved the dream of owning a second home as a vacation getaway. You made a ton of memories. Now maybe you’re hoping to make a tidy profit by selling the property. Here’s what you should know about capital gains tax for a secondary home – and how you may be able to minimize it.

Understanding Capital Gains Tax

Definition and Basics

Capital gains tax is a tax on the profit you make from selling an asset – whether it’s a security like a stock or bond or a physical asset like real estate, a car, jewelry or art.

The IRS offers a $250,000 home sale tax exclusion ($500,000 if filing jointly), meaning that only gains above that amount are subject to capital gains tax. But here’s the rub: because this exclusion is intended for primary residences, you must have owned and lived in the home for at least 24 months over the last five years. And this benefit is only available once during a two-year period.

Odds are your vacation home won’t pass this test. That means you’re likely on the hook for capital gains tax if you sell at a profit. If you’ve owned the home for a year or less, it’s a short-term capital gain, which is taxed at ordinary income tax rates (A potential downside to home “flipping”). If you've owned it for more than a year, you’ll pay long-term capital gains tax, which is typically lower – but the rate depends on your income and filing status.

Tax Rates and Brackets

Below is a breakdown of the 2025 capital gains tax rates and the income ranges they apply to. For simplicity, we’ll only look at rates for single filers and married couples filing jointly.

Short Term Capital Gains

Remember, these are the same tax brackets used for ordinary income:

Example: You sell your ski condo after owning it for 10 months and make a $60,000 profit. This short-term capital gain will be included with all your other taxable income to determine which bracket you fall into – and how much you pay overall at tax time.

Long Term Capital Gains

You’ll be taxed at one of three rates: 0%, 15% or 20%

Example: You and your spouse sell your family’s beach house after owning it for 10 years, at a profit of $100,000. Since your ordinary income is above $96,700 and the combined income is between $96,700 and $600,050, you’ll be taxed at the 15% rate. So, you’d owe 15% of $100,000, or $15,000, for the year the house was sold.

Calculating Capital Gains on a Secondary Home

Determining the Cost Basis

To determine the capital gain from selling a property, you’ll first need to know its cost basis – the amount you spent to buy and improve the home. Generally, that includes the purchase price, settlement and closing fees, and the cost of capital improvements you made while owning the home.

Capital improvements are permanent changes that add value to the home, so they don’t include things like lawn care and routine maintenance. If you added a deck, installed a new roof or renovated the kitchen, those costs can be added to your basis. The higher your basis, the lower your capital gain when you sell.

Calculating the Gain

Your sale price, selling expenses and cost basis all figure into the calculation of your capital gain. The IRS has a more detailed worksheet to help you, but here’s a summary of the steps to take:

Step 1: Determine the sale price, which covers everything you received for selling your home. Along with the cash or check that was handed to you, this can include the value of any mortgage the buyer agreed to assume or any real estate taxes the buyer paid on your behalf.

Step 2: Determine your selling expenses, including a real estate agent’s sales commission, advertising fees and legal fees.

Step 3: Subtract your selling expenses from your sale price. This is your “amount realized.”

Step 4: Now, determine your total basis, the amount you invested in your home, which we covered above.

Step 5: Make what are called basis adjustments, which are payments, credits or benefits you may need to deduct from your basis. These are less common but can include depreciation you were allowed to take for rental purposes, and casualty losses – such as flood or fire damage – you claimed as a deduction on a federal tax return.

Step 6: Add any basis adjustments to your total basis. This is your “adjusted basis.”

Step 7: Subtract your “adjusted basis” (from step 6) from your “amount realized” (from step 3).

Example:

You purchased a vacation home for $400,000, including closing fees. Over the years, you added $75,000 worth of improvements, including a new bathroom, fencing, siding and landscaping, to raise your total basis to $475,000. You have no basis adjustments to make.

Your home sells for $600,000, and your selling expenses come to $20,000 for a realized amount of $580,000.

Your gain is $105,000, or $580,000 minus $475,000.

Strategies to Minimize Capital Gains Tax

Timing the Sale

In real estate as in other parts of life, timing can be everything. The difference between short-term and long-term capital gains tax can be significant, depending on your total income. Unless you’re desperate to sell, it pays to wait at least a year from your purchase. You may also reduce taxes on your gain by selling in a year when your income is lower for any reason.   

Increasing your Basis

As we touched on earlier, any improvements you put into your vacation home will increase its cost basis and reduce your taxable gain upon sale. Just be aware of the point where the potential tax benefits no longer justify the added costs.

Making your Second Home your Primary Home

If you have the flexibility in your lifestyle, you may be able to spend enough time in your vacation home to qualify for the primary residence exclusion of $250,000 ($500,000 for couples filing jointly). Remember, you’d need to live in the home for at least 24 months over the five years leading up to the sale.

Common Questions

What if I Earn Rental Income on the Property?

Many vacation homeowners rent out their properties for some weeks of the year. But the tax treatment and reporting can get complex depending on how often you used the home for yourself versus renting it out. For capital gains purposes, if the home becomes classified as an investment property, any depreciation expenses you were allowed to claim could be deducted from your basis when you sell and potentially increase your taxable gain.

What if the Property is Inherited? 

If you inherited your secondary home, you’re entitled to what’s called a step-up in basis. That means the basis of the property generally becomes its fair market value on the date the person who left it to you died.

This can significantly reduce your capital gain when you sell. Take, for example, a property that was originally purchased for $250,000, but is worth $400,000 on the date of death. If you sell the home at that price, you could have no capital gain – and no capital gains tax.        

Can I Offset Capital Gains with Losses? 

When it’s time to file your taxes, you can offset capital gains with capital losses. But you can also deduct up to $3,000 of your net losses in a tax year and carry over the rest to future years until it’s exhausted.

For example, in 2025 you have a capital gain of $10,000 and a capital loss of $15,000. Your $15,000 loss offsets your $10,000 gain, for a net capital loss of $5,000. You can use up to $3,000 of this loss to reduce other income. The remaining $2,000 of unused loss is carried over to 2026 (or later) where it can be used to offset capital gains or ordinary income. A loss on a personal use property is disallowed and cannot be used to offset any capital gains.

Get Expert Help to Guide You

Selling a vacation property can be lucrative in the right market, but the profit you make comes with capital gains tax to manage. However, the improvements you’ve put into the home and the timing of the sale can help you minimize your tax burden. Talk to a financial advisor and tax professional who can show you how selling could impact your overall tax liability, and help you explore strategies that might be right for you.