With many real estate markets still surging, especially in sought-after places, you may be thinking about selling a vacation home that’s gone way up in value.

But what about the tax hit? Good question.

While the federal income tax home sale gain exclusion break is still on the books, it’s only available for the sale of a principal residence.1 That said, a vacation home will sometimes qualify for the gain exclusion break if you’ve also used the property as a principal residence.

This article explains in plain English the sometimes-complicated federal income tax rules for gains from selling a vacation home. Let’s get started.

Scenario 1: You Have Never Rented Out the Vacation Home

In this scenario, the vacation home is your second home and thus the principal residence gain exclusion break is obviously unavailable. Your profit will be treated as a capital gain and taxed accordingly.

If you’ve owned the property for more than one year and never rented it out, you’ll owe federal capital gains tax at the lower rates for long-term capital gains. The maximum rate for long-term capital gains is 20 percent. But you’ll owe that rate only on the lesser of (1) your net long-term capital gain or (2) the excess of your taxable income, including any net long-term capital gain, over the applicable threshold.

For 2022, the thresholds are $517,200 ... Log in to view full article.