Considerations When Selling A Second Home or Rental Property

In this episode of Protecting & Preserving Wealth, we continue our discussion on the financial and tax implications of selling real estate, shifting focus from primary residences to second homes and rental properties. We open by clarifying the IRS guidelines for determining a primary versus secondary home. The key factor is where the majority of the year is spent, and that’s verified through documents like driver’s licenses and utility bills. This distinction matters because the Section 121 tax exclusion—$250,000 for individuals and $500,000 for married couples—is only available for primary residences. Secondary homes don't qualify, meaning capital gains from their sale are fully taxable.

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⏱️ Chapters & What You'll Learn
(00:00) Introduction and Welcome
(00:31) Defining a Second Home
(01:57) Tax Implications of Selling a Second Home
(03:53) Understanding Long-Term vs Short-Term Capital Gains
(09:47) Selling a Rental Property
(18:40) Conclusion and Contact Information

We explain how the cost basis for a second home is determined, including the original purchase price and improvements, excluding maintenance and repairs. If owned for more than a year, the property qualifies for long-term capital gains treatment, with rates of 0%, 15%, or 20%, depending on taxable income. We stress the importance of tax planning here—timing the sale or utilizing installment sales could result in substantial tax savings, especially for those with minimal other taxable income.

We then transition to rental properties, which come with their own set of tax considerations. These properties allow for depreciation deductions, which can significantly offset rental income. However, we warn about depreciation recapture when the property is sold. We also emphasize the importance of proper legal structuring—typically using an LLC for each rental property, ideally owned collectively by a revocable living trust—to shield personal assets from liability.

We explain benefits of 1031 exchanges for deferring taxes when selling rental properties, and how community property laws in states like Arizona can offer a full step-up in basis upon the death of a spouse, potentially eliminating capital gains tax altogether. For those tired of active property management, we introduce Delaware Statutory Trusts as a way to earn passive income while avoiding common landlord headaches. We can't get into detail on DST's in this podcast, but we are happy to chat with you about them offline.

We close with a caution about trying to game the system. The IRS can and does verify how properties are used, whether that's primary vs secondary residence OR secondary residence vs rental property. The IRS has done this through looking at cell tower data and utility usage. It’s critical to properly classify your real estate from the start to avoid future tax trouble.

For more information about anything related to your finances, contact Bruce Hosler and the team at Hosler Wealth Management: Visit us online at https://www.hoslerwm.com/

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