Vacation home (lived 24 months in 5 yrs)

[FL33161]

We had a vacation home for many years, and this year sold it. We have lived there for 24 months in the recent 5 years. How is this situation to be handled when filing the tax return for the next year? What kind of supporting documents we need to claim the 500K exemption.

[DoninGA]

The capital gain exclusion is only available for your primary personal residence, not on a second/vacation home.

[FL33161]

I thought the only criteria is 24 months in 5 years. Disappointed! Even if we never rented it, and used it for 5 months in year every year (during winter) it doesn't qualify for the exemption? What is the definition for a "primary" residence? 

[DoninGA]

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@FL33161 wrote:

I thought the only criteria is 24 months in 5 years. Disappointed! Even if we never rented it, and used it for 5 months in year every year (during winter) it doesn't qualify for the exemption? What is the definition for a "primary" residence? 

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Go to IRS Publication 523 Selling Your Home on page 3 under Sale of your main home - https://www.irs.gov/pub/irs-pdf/p523.pdf#page=3

[FL33161]

Thanks for the link, DoninGA! I will look into it. Does this vacation home then comes under investment property? We always took standard deduction all these years. Can I add the mortgage interest when calculating the tax basis (and also property tax and insurance for all the years) and improvements (new roof, adding pool, etc)? Where does the ongoing maintenance comes fit in (like painting the house, landscaping, etc)

[DoninGA]

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@FL33161 wrote:

Thanks for the link, DoninGA! I will look into it. Does this vacation home then comes under investment property? We always took standard deduction all these years. Can I add the mortgage interest when calculating the tax basis (and also property tax and insurance for all the years) and improvements (new roof, adding pool, etc)? Where does the ongoing maintenance comes fit in (like painting the house, landscaping, etc)

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If this second home/vacation home was only used as personal use property then it is not investment property.  When you sell the property you can include in the adjusted basis of the home the cost of any home improvements prior to the date of the sale.  Also, any selling expenses can be subtracted from the Sales Price.  You cannot capitalize any mortgage interest or property taxes for prior years.

Repairs and maintenance on the home are not included in the adjusted basis of the home.

[FL33161]

On page 4 of the link (Pub 523, for the year 2021) the last bullet point in the first section (Eligibility Step 5—Exceptions to the Eligibility Test) starts with You used the entire property as a vacation home or
rental after 2008 ... but it doesn't talk more about this in the rest of the bullet point or in the link at the end of the bullet point.

What does this bullet point intends to convey? The property is DISQUALIFIED because it was a second / vacation home?