San Diego Capital Gains Tax on a Second Home in 2023 | 2024
Having a second home is a luxury that not everyone gets to experience, but for those that do, it can have its ups and downs.
Like nearly everything else in life that can be bought, there are pros and cons to owning one, as well as selling one.
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As with the sale of any asset, it can come with taxes, paperwork, and more.
For many of us, this can be these aspects can be the stuff of nightmares, but it does not have to be that way.
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The process can be straightforward and easy to understand, once you know the rules that govern it.
They are specific for this type of property, so it is important to be familiar with them if you own more than one home.
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This is especially true if your second home has never been used for rental or investment purposes.
Keep reading for everything you should be aware of regarding capital tax gains on a second home.
Here's a quick rundown of our list:
Capital Gains
We have discussed capital gains before, but if you are unaware of what the term means, it simply refers to the profit you make when you sell a major asset.
In this instance, a capital gain occurs when you make money through the sale of your second home.
Depending on what type of property you have, there are different tax rules that govern it.
Rules
In the case of a second home, the tax codes are much different than for something like a primary residence.
Previously, you were able to take a tax exemption of up to $500,000 from the amount of your capital gain to offset costs, but this rule was changed and is only valid on primary homes now.
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This is why you can apply for an exemption or a partial exemption if you meet any of the primary residence rules.
The most important one is if you used your second home as a primary home for 2 out of the last 5 years.
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The current federal tax rule for capital gains is based on income.
If you earn less than $400,000, you will have to pay 15% tax, but if you make more than that, you will have to pay 20%.
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This only applies if you have owned the home for at least a year, as you will pay a lower amount if you owned it for less time.
Additionally, if you are in a higher tax bracket, you will be responsible for additional tax amounts.
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There is no deduction in the case of a loss, since the government considers a second home to be your personal property.
An investment property or rental property is subject to rules that may help you alleviate some of the tax burden when you sell it.
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Of course, in order to figure out what you are responsible for, you will have to know the amount of your capital gain.
To get this number, you just have to do a simple calculation:
Amount home sold for – Amount paid for home – Amount of any major improvements made – Applicable closing costs = Amount of Capital Gain
Major improvements include things like adding on parts to the house, such as a garage, or doing things like renovation projects.
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As for the closing costs, you’ll have to check with your seller or agent to see which ones can be subtracted.
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California Rules
When your second home is in California, in some cases, the state may determine that you are a resident.
Being a resident means not only paying capital gains taxes, but also taxes on your income, even if you earned it in different states.
You will need to be aware of these rules, so you will know the proper amount of taxes to pay.
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If you are not a resident, you will likely only be responsible for the capital gains taxes, and not any regarding the income from your job.
This is due to the fact that you earned this money in California.
To figure out what amount you are liable for in state capital gain taxes, you should know your income tax rate for the state.
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Capital gains are calculated at the same rate, which should not exceed 9.3%.
No matter where you live primarily, in order to cover your bases, make sure you can prove your residency, in the event that you need to.
Be sure to save your bills, tax forms, and travel receipts, so you will be protected on that front.
Overview
Capital gains taxes on a second home are not hard to calculate, but may be steep, depending on how much you made off the sale.
You have to remember that there are separate rules for different types of property, and that you will have to pay federal and state taxes.
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The federal rules have changed in the last 10 years, so they don’t work the same as other types of homes.
Furthermore, you will need to know that even if you are not a resident of San Diego, if your second home is located in California, you will be subject to standard state taxes.
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This makes it quite worthwhile to study the laws regarding this before you intend to sell your home.
You may even want to consider converting your property to a primary residence or rental before you intend to sell, in order to alleviate future tax burden.
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To figure out how to do so, you can read this article for more information.
If you are unable to do these things, or need to sell your property right away, it’s just a matter of calculating the proper amounts to see what you’re responsible for.
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Both types of taxes are based on your income, so it is not some complicated formula you’ll have to figure out.
What do you think?
Can you now think of some great strategies in which you can lower your property gains taxes?
I would love to help assist you with your home purchase, home sale, or home loan - please feel free to give me a call, text, or use the form below.
Your Property Gains Tax Insider,
Scott
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