What are the capital gains taxes on the sale/purchase of a summer home?

Question

I am considering selling a beach house and buying another beach house. I would realize about a $500K capital gain on the house I sell. If I buy another beach house with the proceeds of the sale, will I be liable for capital gain taxes when I roll the money into a purchase of like kind?

Answer 1

You may be able to do a 1031 exchange if the property is used for investment or business. This will allow you to delay paying taxes on the gain. See the link to the IRS website that discusses the issue.

My advice would be to consult a CPA to ensure everything is done properly.

I am a CPA and would be happy to help you. Feel free to email me.

Answer 2

A 1031 exchange as suggested by another poster is ONLY applicable for investment property as he correctly notes. The IRS isn't likely to consider a beach home as an investment unless you rent it out all or most of the time.

Since it is not an investment and is not your principal residence then there is no way around the capital gains tax bite, either as an exclusion or delay.

To exclude the gain from tax you would have to occupy it as your principal residence for 2 of the 5 years immediately prior to the sale. Those 2 years do NOT have to be consecutive periods of time. If you occupied it for at least 730 days at any time in the 5 years prior to the sale you could exclude $500k of gain from tax if you are married filing a joint return. That works out to about 146 days per year on average or a bit less than 5 months per year. If you're close to meeting that "magic" number it may well be worth moving to the beach house for a while as you'll save up to $75,000 in capital gains taxes by doing so. (It doesn't matter what you do with the proceeds, by the way. You could buy bubblegum with it for all the IRS cares; you do NOT need to reinvest it.)

If you can't rig things to qualify for the exclusion you'll have to bite the bullet and pay the tax. At least it will be treated as a long term capital gain which draws a lower tax rate, normally 15% unless your marginal rate is already 15% or less where it would be 5%. Rolling the proceeds into another beach house will NOT get you away from the tax liability, I'm afraid. But look at the bright side: You'll have around $425,000 in cash to play with. Not many folks can make that claim.

Answer 3

Buying another beach house with the proceeds won't change the fact that tax is due on the sale of the first one - it isn't your main home, so isn't eligible for exclusion from being taxes. Capital gains tax will be 15% of your gain. If the $500 K is really gain, not just sales price, then you'd owe $75,000 in capital gains tax as long as you owned it for over a year - tax would be more if you owned it for a year or less.

Answer 4

Assuming that the purchase won't qualify for a like kind exchange, if it is a short term gain, then it is taxed as ordinary income. However, if it's a long term gain, then the maximum tax that you will pay is 15%.