How to Avoid Capital Gains Tax on Your Vacation Home

Posted by Team Donovan on Wednesday, June 17th, 2020 at 9:01am.

Selling a vacation home can mean more money in your pocket. But as a home investor, you have to consider tax liabilities that can eat away at your profits.

In the United States, capital gains taxes may be applied when homeowners sell their Kissimmee vacation rentals. You can avoid the capital gains tax on your short-term rental home when you know what steps to take to minimize your tax liability.

Deduct Your Homeowner Expenses

When you own a vacation home, there are expenses you can deduct to reduce your capital gains tax. These include the interest on your mortgage as well as insurance and maintenance expenses. As a vacation home owner, it’s important to keep records of your expenses. You may need to show receipts or other records, such as an insurance statement, in order to qualify for the deductions.

Money spent on home improvements can reduce your capital gains tax as well. Home improvement costs lower the profit earned from your home, which can reduce or eliminate any potential tax liability. For example, if you paid $300,000 for a vacation home, then made $50,000 in improvements and sold the property for $350,000, you wouldn’t own any capital gains taxes since you didn’t actually make a profit on the sale.

Unload Other Investments at a Loss

Stocks and other investments are also considered when calculating capital gains. If you sell your vacation home at a profit, other investments that decreased in value during the tax year could offset your total capital gains taxes.

For example, a loss of $10,000 in the value of investments you’ve sold would eliminate your tax liability on the sale of your vacation home if it were equal to or less than $10,000.

Know Your Taxable Income

If you have a low taxable income, you may be able to avoid a capital gains tax on the sale of your Orlando vacation home. And even if you have a higher income, you can lower the portion of your income that can be taxed by taking advantage of available deductions and credits.

Consider contributions to retirement accounts and other investments that can reduce your taxable income. Working with a financial professional can help you identify the best options for your situation, financial needs, and goals. U.S. residents should be aware that the capital gains rate is determined by your marginal tax rate. That means if your marginal tax rate is 10 or 15 percent, you won’t have to capital gains taxes.

Donations Can Lower Your Tax Burden When Selling Your Vacation Home

There are many ways to invest or spend the profit earned from the sale of your vacation home. But donating some portion of that money can reduce your capital gains tax. Claiming this deduction may not eliminate your tax liability, but it may lower it, saving you from handing over a sizable portion of your profit after selling your home.

The CARES act that was passed in 2020 in response to the pandemic has increased the amounts of charitable deductions you can take on your 2020 tax returns. Be sure to talk with your tax advisor to take full advantage of the deductions allowed by the law.

Team Donovan helps today’s home investors buy and sell Kissimmee vacation rentals so that you can get the most out of your investment and achieve your financial goals. Our team communicates regularly with our clients, whether they live here in the U.S. or overseas to ensure your transaction is accomplished smoothly and quickly from start to finish. Learn how we can sell your holiday home today. Call (407) 705-2616 or fill out our online request form.

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