Second homes became very popular during the pandemic because of the drastic rise in work-from-home flexibility. Who the hell wouldn’t want to work from the beach?! Owning a second home allowed homeowners to spend more time in their favorite places or even to spread out from their spouse or other family members who were also primarily always at home. Others also own second homes to use as a vacation home or even to rent out as a stream of income.
But what if you bought a second home that you are no longer using? Maybe you have shifted back into the office, or maybe your needs and priorities have changed and you find you are just not utilizing the second home as much. It may be time to sell it.
The good news is that you can reap the profits of the home sale – especially if the property has increased in value over the years, which it likely has. The not-so-great news is that you will likely be subject to the capital gains tax (CGT). Fortunately, there are ways to prepare for these taxes and even some steps you can take to mitigate them.
Just like with income tax, the capital gains tax is not a flat fee, but rather a percentage of the profit. Also remember that the percentage will change based on what tax bracket you are in. There are ways to avoid paying some, or all, of your capital gains taxes, but there are very strict guidelines that need to be followed, so make sure you are working with a highly experienced professional (like me) to guide you through the process.
The best strategy for lowering your CGT is to minimize your net profit. How? Deductions! Any money you invested to renovate or repair your second home can be deducted from the profit. For example, if you put a new roof on the house, deduct that. You can also deduct costs associated with the purchase and sale of the second home. Things like realtor commissions, inspections, origination fees, etc. can all be deducted from your net profit, therefore lowering your CGT.
Again, you’ll need to follow the guidelines, which means carefully saving receipts and tracking expenses so that you can accurately file your taxes when the time comes. I highly recommend seeking professional help when going through this process to avoid any pitfalls that may lead to an audit. I’m not an accountant or CPA after all. Need help or need to be put in touch with someone who can? Give me call. I got people. LOL