Tax Guru-Ker$tetter Letter

Wednesday, February 23, 2005

Rules Are DIfferent For Primary & Second Personal Residences

There has never been a shortage of misinterpretations of tax law, such as in this question we received the other day.

Help me with this one.

I understand that a vacation property can be classified as a second home. By this I mean that it actually qualifies for tax exemption as your residence when you sell it.

Is it possible to do a tax free exchange from a duplex to a condo and then sell this after a period of time, like five years, as a second home per my understanding above?

The duplex is pure rental property. The condo will be used by us and rented by a property manager when we are not using it.

My Reply:

You are correct that a vacation home can be considered as a second personal residence, which allows you to deduct its mortgage interest and property taxes on Schedule A.

You are wrong, however, in regard to the tax free exclusion of gain. That is only available for the sales of primary residences. Second homes have no tax free sale treatment. Any gain is taxable, and any loss is not deductible.

You can see the rules for tax free sales of primary residences at:
www.taxguru.org/re/primary.htm

I hope this clears this matter up for you.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/23/2005 04:55:00 PM Send this post: