Beach houses are considered the same as any other house in terms of taxation. If your beach house is a holiday home or a financial instrument, however, you may face much greater taxes on its sale than if it were your main home. That being said, you can bypass or postpone part or all of your tax burden with planning or dexterity in how you use the proceeds from your sale.
How Gains and Losses are Calculated
Calculating your prospective profits or losses is the first step in preparing for the selling of your beach house. The IRS does not deduct the purchase cost from the retail price for calculating losses. You can enhance your purchase price by including non-loan closing charges that you paid when you acquired the house. You can also include the cost of any house renovations. Some large renovations that prolong the life of the home, such as siding replacement, repiping, or installing a new roof, are also considered capital improvements. You reduce your total cost from your net retail price after commissions, fees, and closing costs have been paid.
Selling Your Beach House at a Loss
There is little need for tax planning when you sell your principal house at a loss. Individual residence losses are not subject to taxation and do not provide you with any tax benefits. As a result, you can sell the house whenever and however you like, knowing that the sale is tax-free.
If your beach house is your principal residence, you are eligible for the same capital gains exclusion as if it were any other property. And you must have used it as your principal residence for two of the preceding five years to be eligible for the exemption, as well as not claiming the exclusion on any other property in the past two years. Following these guidelines can get you on to the next level.
Additional Personal Homes
Every revenue you realize on the sale of your second, third, or ninth house is privy to taxation. If you’ve had your property for at least a year, the tax will be 15, 18.8%, or 23.8 percent, based on your earnings. One tax planning method is to keep the house for at least a year to take advantage of the lower long-term capital gain rates. Another option is to live in the house for two years, or long enough to obtain financing for two years of use as a principal residence if you’ve already lived there for a while.
Keep in mind, however, that your capability to request the exemption will be constrained by a method that splits the number of years you’ve owned the house by the number of years you’ve used it as a primary residence. This can result in a considerable cap on the value of homes you’ve held for a long time.
If none of these techniques works, your other approach is to hire other significant assets at a loss to offset the gain. At the end of the year, the IRS aggregates all of your capital gains, so if you have a $100,000 taxable gain on your house, you can offset it by selling stock that you’ve lost $100,000 on.
Commercial Real Estate
Your tax estimate varies if your beach house is a rental property that you don’t live in. If you have a profit, you must balance it or pay capital gains taxes on it, but if you have a loss, you can use it to balance other investments’ profits.
Regrettably, any depreciation that you obtained at a rate of 25% will have to be repaid. Notwithstanding, you can postpone all of these taxes by utilizing the profits from your sale to buy more investment property through a process known as a 1031 Exchange.
A 1031 Exchange allows you to deposit the proceeds from the sale with a private entity that purchases on your behalf. After which you have 45 days after your property sells to designate a certain number of assets that you might acquire, and another 135 days to ultimately purchase one or more of them.