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JULY 1, 2019

Will I have to pay capital gains tax on the sale of my second home?

Yes, when selling a second home you would, in general, owe capital gains taxes on any profit you make when selling it. But certain exclusions may apply. If you purchased your home as your primary residence, and it was your primary residence for at least two of the five years immediately preceding the sale (known as the "2/5 year rule"), you can generally exclude up to $500,000 of gain on the sale if you're married and filing jointly. That amount is up to $250,000 for all other filers. If you purchased your home as a second home and it served at some point as your primary residence, different rules apply.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
If you purchased your home as a second home and it meets the 2/5 year rule, the amount of capital gain exclusion depends on the amount of time between January 1, 2009, and the date when the home first became your primary residence, as well as the number of years you owned the home.
Say you bought a vacation home on January 1, for $400,000, made it your primary residence on January 1, 2015, and turned it back into a vacation home two years later, on January 1, 2017. Then you sold it a year after that, on January 1, 2018. You would have owned the home for 11 years (from 2007 to 2018). Your period of non-qualified use would be six years (from 2009 to 2015). Therefore, six-elevenths, or $272,727 of your $500,000 gain would not qualify for the exclusion. If you are married and filing jointly, your maximum exclusion is $500,000; however, the actual exclusion from income would be $227,273 ($500,000 less $272,727).
Tax on sale of second home chart. What the capital gains taxes might be if you realized a gain of $100,000 on the sale. (on left) Annual income between $39,375 and $434,500 (singles); and $78,750 and $488,850 (couples), may realize an 85% profit of $85,000 and incur a 15% tax of $15,000. (on right) Annual income over $434,500 (singles); and $488,850 (couples), may realize an 80% profit of $80,000 and incur a 20% tax of $20,000.
But don't think you can split time between two homes and then sell them and claim them both as your primary residence. The exclusion does not apply to a second home sale that occurs within two years of you using the primary-residence sale exclusion on a different house, subject to limited exceptions. If you're contemplating the sale of your second home, you should consult your personal tax advisor to determine whether you may qualify for the primary-residence sale exclusion.
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