Selling Your Vacation Home? Here’s What the IRS Wants You to Know

By Kamish & Associates | Tax Planning & Advisory

Thinking about selling your vacation home? Whether it’s a beach house, mountain cabin, or lakeside retreat, it’s important to understand how the IRS views this type of sale — especially when it comes to capital gains taxes, depreciation, and reporting requirements.

Below, we break down the most common scenarios and how to prepare for a tax-smart sale.

How Have You Used the Property?

Your vacation home’s usage history determines how the sale will be taxed. Here are the three most common scenarios:

1. Primary Residence

If you’ve lived in the home as your main residence for at least two out of the past five years, you may qualify for the Section 121 exclusion, which offers:

• Up to $250,000 in capital gains exclusion (single filers)

• Up to $500,000 for married couples filing jointly

⚠️ Note: If you also rented the property or used it for business, your exclusion may be reduced or disqualified.

2. Personal Use Only

If the home was strictly for your personal enjoyment (no rental income ever reported), the full gain from the sale is taxable as a capital gain:

• If held over one year, you’ll pay long-term capital gains tax (0%, 15%, or 20%, based on income)

• You can add the cost of improvements to the property’s basis to reduce the taxable gain

3. Rental or Mixed Use

If the vacation home was used as a rental property (even part-time), this changes everything:

• You must recapture any depreciation taken during rental years (taxed at up to 25%)

• Any remaining gain is taxed at the applicable capital gains rate

• The IRS will factor in your personal vs. rental use ratio

Depreciation Recapture: What You Need to Know

Even if you only rented the property occasionally, if you claimed depreciation, you must “recapture” it when you sell:

• This amount is taxed at a maximum rate of 25%

• Even if you didn’t claim depreciation, the IRS still expects you to account for it

Proper records of when and how much depreciation you claimed will be crucial here.

IRS Reporting Requirements

Regardless of how you used the home, you’ll need to report the sale to the IRS using:

• Form 8949 – for individual asset sales and adjustments

• Schedule D – to summarize capital gains and losses

Gather all records, including:

• Original purchase price

• Closing costs

• Documented improvements

• Rental income statements

• Depreciation schedules

Can You Defer Taxes With a 1031 Exchange?

A 1031 like-kind exchange allows you to defer taxes on the gain if:

• The vacation home was held for investment or business purposes, not personal use

• You reinvest the proceeds into another qualifying investment property

Personal-use homes are not eligible for 1031 exchanges.

Tips to Maximize Your Tax Outcome

Before putting your vacation home on the market, we recommend the following:

✅ Review how the property was used in the last 5 years✅ Collect documentation on all improvements, depreciation, and rental income✅ Meet with a tax professional to determine the best reporting strategy✅ Explore timing your sale for maximum tax efficiency

Let Kamish & Associates Guide You

Selling a vacation home can bring incredible memories — and complex tax questions. At Kamish & Associates, our experienced team can help you:

• Evaluate capital gains scenarios

• Strategically time the sale

• Minimize your tax liability

• Stay fully compliant with IRS reporting

📅 Book a consultation today to protect your gains and plan with confidence.

This blog post is for informational purposes only and does not constitute legal or tax advice. For guidance specific to your situation, please contact a licensed tax professional.