The average house seller made a staggering $94,000 in profits last year. That is an increase of 71% over the last two years. It is 45% over the 2020 numbers. These profits were great for people selling their primary residence, but what about those who market second houses and holiday homes? That is a unique situation, as profits from second homes are taxed differently than profits from first homes. You may be able to exempt up to a specific amount of capital gains with your primary residence. On the other hand, if you sell second houses and other investment properties, you have to pay taxes on those earnings, usually at a significant cost. Here are a few things to keep in mind.

1. 1. You Must Pay Taxes On Capital Gains

Anytime you sell an asset that you've owned for more than a year, you also need to pay capital gains taxes. You pay them based on the sale's profit, less any improvement and transfer expenses. For most homeowners, the capital gains tax rate is 15%, or about $7,500 for every $50,000 in earnings. However, it depends on income. Primary residences are exempt from these taxes for up to $250,000 in profits if you file your returns alone or $500,000 if you file jointly,

1. 2. Capital Gains Taxes Are Avoidable, But You Must Prepare 

When you sell your second property, there are several tips to help you navigate capital gains taxes. However, they demand some planning. Consider staying at the house for a considerable amount of time. It doesn't need to be consecutive. However, the property must have been your principal residence for at least two of the previous five years. If it wasn’t your primary residence, you are still liable for capital gains tax on second home.

If that isn't an option, consider selling after retirement when your taxable income is significantly lower. The amount of capital gains taxes you will have to pay on the sale may be reduced or completely eliminated. Finally, you can sell quickly. You can qualify for a short-term gain by selling before the year passes. 

1. 3. Prepare for Your Sale's Tax Implications

The temptation to sell your property is strong when you look at current home prices. Ensure that you think of your tax repercussions first. If possible, time your transaction correctly. Try to set aside a significant amount of money in your budget for capital gains taxes if proper timing is impossible. Plan to keep the funds untouched until tax day.

The likelihood that you will sell your home at some point is high. Rarely do people stay in their homes their entire lives. Generally, selling a home is less complicated than buying one. However, that doesn't mean that everyone sells their homes effectively. Just because it might be simpler to sell than to acquire doesn’t mean you won’t have any challenges.

Selling your second home is not always as simple as it may seem. You need to plan and prepare for the tax implications that come with it. Take advantage of the above tips to streamline your process.