capital gains tax
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Calculating Capital Gains Tax on Second Home Sales

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In the second article of his two-part series on tax impacts sellers of vacation homes should be aware of, tax guru Julian Block discusses how to calculate capital gains tax when you're selling a second home that was previously a primary residence, as well as what clients should know about Section 121's "nonqualified use" clause.

Sep 9th 2021
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Just joining in? Go back to part one, which contains information about a tax hit for sellers of vacation homes, and enlighten yourself on why an irked Congress enacted Code Section 121 (b) (5). Its precise wording curtails the availability of a series of full exclusions of as much as $500,000 for profits from home sales when sellers own several homes. 

Part two will focus on the highlights of the current rules that went on the books at the start of 2009. To illustrate how they work, I’ll again apply them to sellers Harold and Marian Hill. 

“Nonqualified use.” Section 121 sets strict limits on how much gain the Hills are allowed to exclude from sale of a vacation place that they convert into their new principal residence. 

Section 121 authorizes the Internal Revenue Service to cut itself in for a share of the profit when Harold and Marian ultimately sell the place. It’s verboten for the Hills to exclude profit attributable to periods of “nonqualified use” that precede the place’s use as a principal residence. 

How does the law define nonqualified use? Generally, it’s any periods after 2008 that the Hills (or any former spouses) didn’t use the former vacation retreat as a principal residence. Put another way, the IRS won’t allow the Hills to exclude profit allocable to such periods during which they use the place as a vacation home or rental property.

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