How do I report the sale of my second residence?

If you sell a second residence (such as a vacation home or other personal-use property that is not your primary residence), the sale is generally reported as a taxable capital transaction on your federal tax return.

1) No primary residence exclusion applies

The §121 home sale exclusion ($250,000 single / $500,000 MFJ) applies only to your principal residence. A second home does not qualify.

• Gains from the sale of a second residence are taxable
• Losses from the sale of personal-use property are not deductible

2) How to calculate your gain or loss

Capital Gain (or Loss) = Selling Price − Selling Expenses − Adjusted Basis

Adjusted basis generally includes:

• Original purchase price
• Certain acquisition costs
• Capital improvements (e.g., additions, remodels, roof replacement)
• Reduced by casualty loss deductions (if any)

3) Where to report the sale on your tax return

Step 1: Form 8949 – Sales and Other Dispositions of Capital Assets

• Report the property as a capital asset
• Use:
  
  • Part II for long-term (held more than 1 year)
  • Part I for short-term (held 1 year or less)

Step 2: Schedule D – Capital Gains and Losses

• Totals from Form 8949 flow to Schedule D
• Net gain is taxed at applicable capital gains rates

4) Capital gains tax rates (2025)

If the property was held more than one year, gains are taxed at:

• 0%, 15%, or 20% long-term capital gains rates, depending on income
• Plus 3.8% Net Investment Income Tax (NIIT) if applicable

5) Special situations

a) If the home was ever rented

If the second residence was rented at any point:

• You must recapture depreciation taken or allowable
• Depreciation recapture is taxed at up to 25%
• Report depreciation recapture on Form 4797
• Net gain still flows to Form 8949 → Schedule D

b) If it was formerly your main home

You may qualify for a partial §121 exclusion if:

• You meet the 2-out-of-5-year ownership and use test
• Periods of nonqualified use after 2008 reduce the exclusion

6) Losses on second homes are not deductible

If you sell a second residence at a loss:

• The loss is not deductible
• Because it is personal-use property

Summary 

• A second residence does not qualify for the home sale exclusion
• Gains are taxable and reported on Form 8949 → Schedule D
• Losses are not deductible
• Rental use triggers depreciation recapture

Source:

• IRC §121(a)
• IRS Pub 523 – Selling Your Home:
• IRC §165(c)
• IRS Pub 544
• IRC §1(h) (Capital gain rates)
• IRC §1411 (NIIT)
• IRS Topic No. 409 – Capital Gains and Losses:
• IRC §121(b)(5) (Nonqualified use)
• About Form 8949
• About Schedule D (Form 1040)
• IRC §1011 (Adjusted basis)
• IRC §1012 (Cost basis)
• IRS Pub 551 – Basis of Assets:
• IRC §1250 (Depreciation recapture)
• IRS Pub 527 – Residential Rental Property:
• IRS Pub 544 – Sales and Other Dispositions of Assets: