SELLING YOUR VACATION HOME? WATCH OUT FOR THESE TAX SURPRISES

Although you may enjoy a sizable profit, Uncle Sam will take a share.

- BY JOHN WAGGONER

WHEN Aimee LaMont and her husband, Ray Struble, sold their rental house in Fairfax, Va., they got a six-figure surprise from their accountant. “We got a good-size tax bill,” says LaMont. And how: They paid about $172,000, she says.

Given the growth in home prices, you, too, could pay big taxes on your gains, especially if you sell a home that isn’t your primary residence. The median U.S. home sale price—half of sales were higher, half were lower—was $419,200 in the fourth quarter of 2024, up 28% over the past five years and up 40% over the past 10 years, according to data from the Federal Reserve Bank of St. Louis.

If you're selling your second home, be sure to hold back some of your profits so that you have enough cash to pay the tax bill. Below, we outline four surprises to prepare for, as well as tips to lower (or defer) your tax liability.

Surprise one: No capital-gains exclusion.

When you sell your primary residence, you get a huge tax break. Couples filing a joint return can exclude $500,000 of the gain from taxes, while single filers can exclude $250,000.

You don’t get that tax break for a vacation home. You'll pay federal and state capital gains taxes on your entire profit. (If the home is in another state, you may wind up paying taxes in both states.) The same is true for a rental property.

Federal capital gains tax ranges from zero to 20%. High earners—single filers with modified adjusted gross income of $200,000 or more and couples filing jointly who have MAGI of at least $250,000—could end up paying an additional 3.8% net investment income tax.

Let’s say that you bought your vacation home for $250,000 and sold it 10 years later for $850,000. You'd owe capital gains taxes on your $600,000 gain. Uncle Sam’s 20% cut would be $120,000. Ouch.