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Old 02-27-2018, 12:57 PM
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Capital Gains on Sale of a Second Home

If a second home is sold, tax must be paid on any positive amount resulting from the sale price less the original base price.

If the home in question was purchased, for example, in 2001, and had major improvements made, it is my understanding that these improvements would add to the base price.

If the home in question then suffers a severe amount of damage (e.g., from flooding) that is covered by insurance, this, basically, makes the person insured "whole", so there is no change to the base price established when improvements were made. Is this a correct assumption?

If the insured then totally renovates the property, is the cost of the renovations added to the original base price of the home resulting in a new base price?



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Old 02-28-2018, 06:59 AM
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If a second home is sold, tax must be paid on any positive amount resulting from the sale price less the original base price.==========>It depends; when you sell your second home at a gain, determining your holding period becomes extremely important. The holding period of capital assets refers to the length of time you own the property before selling it. For a second home that you own for one year or less, you must report it as a short-term capital gain. And for all other properties you own for more than one year, classify it as a long-term gain. The significance of these two holding periods is that your short-term gains are subject to the same ordinary income tax rates that apply to most of the other income you report on your tax return. However, the capital gains rates, which are generally lower than ordinary rates, apply to your long-term gains.UNLESS your tax bracket is higher than 15%, you do not need to pay tax on your long term capital gain;

If the home in question was purchased, for example, in 2001, and had major improvements made, it is my understanding that these improvements would add to the base price.====>Correct; the added improvements can reduce yur capital gain amount ; for tax purposes, a home improvement includes any work done that substantially adds to the value of your home, increases its useful life, or adapts it to new uses. These include room additions, new bathrooms, decks, fencing, landscaping, wiring upgrades, walkways, driveway, kitchen upgrades, plumbing upgrades, and new roofs.
If you use your home purely as your personal residence, you cannot deduct the cost of home improvements. These costs are nondeductible personal expenses.
However, this doesn't mean that home improvements do not have a tax benefit. They can help reduce the amount of taxes you have to pay when you sell your home at a profit. This is because the cost of home improvements are added to the tax basis of your home. "Basis" means the amount of your investment in your home for tax purposes. The greater your basis, the less profit you'll receive when you sell your home


ALSO,If you treated your second home as an investment property, you could potentially escape capital gains tax through a 1031 exchange, but this means reinvesting in a relatively short period of time. A 1031 exchange involves placing your profits from the sale with a third party, such as a bank or a title company. You must then select a new property to invest in within 15 days of the sale of the first property and close on its purchase within six months. To avoid paying recaptured sec 1250 tax on the deprecaitin expenses taken previously while the home was used as an investment property, you need 1031 excahnge.

If the home in question then suffers a severe amount of damage (e.g., from flooding) that is covered by insurance, this, basically, makes the person insured "whole", so there is no change to the base price established when improvements were made. Is this a correct assumption?=======>correct;since you did not spend your own money to repair the severe damage, but it was covered by yur home insurance.

If the insured then totally renovates the property, is the cost of the renovations added to the original base price of the home resulting in a new base price?===========>correct since you spend your own money to renovate your home; Home improvements may come into play when you sell your home because they're included in your home's adjusted cost basis. The bigger your basis, the smaller your capital gain, and that means less tax To qualify as a tax deduction, the home improvement must:Add materially to the value of your home; orProlong your home's useful life significantly; orAdapt your home to new uses.



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