Key takeaways:
- No primary residence exclusion available: When selling a second home, you can’t use the primary residence exclusion that allows $250,000/$500,000 in tax-free gains.
- Multiple tax reduction strategies exist: Various approaches can help reduce your capital gains tax burden on second home sales.
- Key strategies include: Increasing your cost basis with improvements, potentially using 1031 exchanges, or offsetting gains with investment losses.
Understanding second home capital gains
Whether it’s a mountain house in Aspen, CO or a beach condo in Atlantic City, NJ, your vacation home (and any second home) is considered a capital asset under IRS rules. Unlike primary residences, second homes that are not used as primary residences, including vacation homes and investment properties, are considered to be capital assets under IRS rules and do not qualify for the capital gains tax exclusion.
The amount of capital gains tax you’ll owe on the sale of a second home depends on several factors, including how long you owned the property and your income level. For 2025, the long-term capital gains rates are:
- 0% for single filers with taxable income up to $48,350 and married couples filing jointly up to $96,700
- 15% for most middle-income taxpayers
- 20% for single filers with income over $533,401 and married couples over $600,051
High-income earners may also face the 3.8% net investment income tax, making the effective rate as high as 23.8%.
Adjust your cost basis with acquisition costs and improvements
One of the most effective ways to reduce capital gains is to increase your cost basis — the amount you originally paid for the property plus qualifying improvements.
What you can add to cost basis:
Acquisition costs:
- Purchase price
- Closing costs
- Title insurance
- Attorney fees
- Recording fees
- Survey costs
Capital improvements: Capital improvements are permanent repairs or upgrades, not including routine repairs or maintenance. Examples…