Yes, you generally pay capital gains tax when you sell a second home. The $250,000/$500,000 exclusion that shields profit on a primary residence doesn’t apply to a vacation property or rental, so the profit is taxable.1Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence What you actually owe depends on three things: how long you owned it, whether you ever rented it out, and your income in the year of the sale.
How to Calculate the Gain
Your taxable gain is the amount realized on the sale minus your adjusted basis in the property. Both numbers are worth pinning down carefully, because every dollar you can add to basis or subtract from the sale price is a dollar you don’t pay tax on.
Adjusted Basis
Basis starts with what you paid, including closing costs like title insurance, recording fees, and legal fees from the purchase. Then it moves in two directions.
Capital improvements push it up. These are projects that add value, extend the property’s useful life, or adapt it to a new use: a new roof, an added deck, an HVAC replacement, a finished basement, a gutted and remodeled kitchen. Routine repairs and repainting don’t count.2Internal Revenue Service. Tangible Property Final Regulations Keep receipts. Years later, those records directly reduce your tax bill.
Depreciation pushes basis down. If you rented the property at any point, you were required to depreciate it over 27.5 years, and the IRS reduces your basis by the depreciation you were entitled to deduct even if you never actually claimed it.3Internal Revenue Service. Publication 527, Residential Rental Property Lower basis, bigger gain.
Amount Realized
The sale price isn’t your amount realized. Subtract selling costs first: real estate commissions, advertising, legal fees, transfer taxes, and any of the buyer’s loan charges you agreed to pay.4Internal Revenue Service. Publication 523, Selling Your Home Commissions alone typically run 5% to 6% of the sale price, so this step matters.
What Rate You Pay
The holding period sets the rate. Own the property for one year or less and the gain is short-term, taxed at your ordinary income tax rates.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses Own it for more than a year and the long-term capital gains rates apply.
For tax year 2026, the long-term brackets are:6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- 0% on taxable income up to $49,450 single or $98,900 married filing jointly.
- 15% from $49,451 to $545,500 single, or $98,901 to $613,700 married filing jointly.
- 20% above $545,500 single or $613,700 married filing jointly.
Most sellers land in the 15% band. But the gain itself counts toward the taxable income that determines your bracket, so a large gain from a property held for decades can push part of it into the 20% tier even when your salary alone wouldn’t.
Extra Layers if You Rented It Out
Renting the property in prior years adds two costs at sale that a pure vacation home doesn’t face.
Depreciation Recapture
The IRS splits your gain in two. The portion equal to the total depreciation you claimed (or were entitled to claim) gets recaptured and taxed at a maximum rate of 25%, regardless of which long-term bracket otherwise applies. If your overall rate is below 25%, you pay the lower rate on this piece. The remaining gain, the appreciation portion, is taxed at the standard 0%, 15%, or 20% long-term rates.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses
This is the sting. Owners love annual depreciation because it shelters rental income year by year, but every dollar deducted comes back at up to 25% when they sell. On a rental held 15 or 20 years, that can total hundreds of thousands.
Net Investment Income Tax
Higher earners owe an additional 3.8% surtax on investment income, and the capital gain from a second-home sale counts.7Internal Revenue Service. Net Investment Income Tax It hits the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 single or $250,000 married filing jointly. Those thresholds aren’t indexed for inflation, so more sellers cross them each year.8Internal Revenue Service. Questions and Answers on the Net Investment Income Tax For a top-bracket seller who also triggers the NIIT, the effective federal rate on the appreciation portion is 23.8%.
Ways to Reduce or Defer the Tax
Move In Before Selling
Converting a second home into your primary residence can unlock part of the $250,000/$500,000 exclusion, but not as much as you might hope. You still need to own and use the property as your principal residence for at least two of the five years before the sale.1Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence And the exclusion is prorated for periods of “nonqualified use.” Any time after December 31, 2008, when the home wasn’t your principal residence counts against you.
An example: you own a vacation home for 10 years after 2008, then move in for 2 years and sell. Total ownership is 12 years, and only 2 count as qualified use. You can exclude roughly one-sixth of the gain, up to the cap. The other five-sixths is fully taxable. Any depreciation from a rental period is still recaptured at 25% on top of that; the proration only helps the appreciation portion.
1031 Exchange
A like-kind exchange lets you defer the tax by rolling the proceeds into another investment property.9Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment Defer, not erase. Both properties must be held for business or investment. A pure vacation home doesn’t qualify, but there’s a safe harbor: if you rented the property at fair market value for at least 14 days in each of the two years before the exchange, and kept personal use at or below the greater of 14 days or 10% of rental days in each of those years, the property qualifies.10Internal Revenue Service. Revenue Procedure 2008-16, Safe Harbor for Dwelling Unit Qualification Under Section 1031
The deadlines are unforgiving. You have 45 days from closing to identify replacement properties in writing and 180 days to close on one (or by your return’s due date, whichever is earlier).11Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 A qualified intermediary must hold the proceeds. Touch the money yourself and the exchange fails, which is where most casual attempts collapse, because the intermediary has to be set up before the sale closes.
Inherited Property and Stepped-Up Basis
If you inherited the second home, the tax math is entirely different. The basis resets to fair market value on the date of the prior owner’s death.12Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent Decades of appreciation vanish for tax purposes, and any depreciation the prior owner claimed is wiped out too.
A parent’s beach house bought for $80,000 in 1985 and worth $600,000 at their death gives you a $600,000 basis. Sell for $620,000 a year later and your gain is $20,000, not $540,000. Selling relatively soon after inheriting usually minimizes the bill, because new appreciation is what gets taxed.
Selling at a Loss
Not every sale is a gain. What happens with a loss depends on how you used the property. On a purely personal vacation home, the loss isn’t deductible at all: personal-use losses don’t count toward the $3,000 annual capital loss deduction.13Internal Revenue Service. What if I Sell My Home for a Loss On a pure rental, the loss generally qualifies for Section 1231 treatment, which can produce an ordinary loss deductible against other income like wages.14Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets On a mixed-use property, only the loss attributable to the rental portion is deductible.
State Taxes
Federal isn’t the whole bill. Most states tax capital gains as ordinary income. About eight states have no state income tax on the gain, and the rest tax it at rates ranging roughly from 2.5% to over 13%. A few states treat capital gains more favorably than regular income; most don’t. Some states also charge a transfer tax on the sale itself, though those are usually modest next to the income tax on the gain. Which state’s rules apply depends on where you live and where the property sits.
Reporting the Sale
The closing agent typically files Form 1099-S reporting the proceeds, so the IRS already knows the sale happened. You report it on Schedule D and Form 8949, showing the purchase date, sale date, amount realized, and adjusted basis.15Internal Revenue Service. Topic No. 701, Sale of Your Home If you owe the Net Investment Income Tax, that goes on Form 8960.16Internal Revenue Service. Topic No. 559, Net Investment Income Tax For a former rental, depreciation recapture is calculated on Form 4797. The IRS matches the 1099-S against your return, so an unreported sale is an easy audit trigger.