Capital Gains On Selling Home

Question: Is there any way to avoid paying capital gains tax on a vacation home?

I have a vacation home in Az. We want to sell this home. How do I get around paying capital gains on it? It is worth about $250,000. My permanent residence is in Bridgman, Michigan. Again that is my secondary home.

Answer: I assume that the property in Arizona has appreciated in value since you purchased it. The difference between your purchase price and your selling price (less improvements) is your gain in value. The general rule is that you pay capital gains taxes on this increase. We have a number of second homes in our area along Lake Michigan. Some of my more aggressive clients have treated their second homes as "investment property". I have not endorsed this decision, but I pass along that a number of people are taking this approach. You will have to do your own research to determine if you are comfortable taking the risk that the IRS will accept this aggressive designation. Section 1031 of the Internal Revenue Code allows a taxpayer to defer the gain on "investment property" when exchanged for like-kind investment property. Most title companies will help you do this for a fee that is small relative to the taxes saved. You can then use the full proceeds of the sale to reinvest in some "investment property." I also note the advice I received from my father-in-law who was a wise man. The only problem worse than having to pay taxes, is having no taxes to pay. Good luck with your decision.

Attorney: Mark Miller