Basis, improvements and what counts as gain
Gain on sale is the sale price minus your adjusted basis. Basis starts at what you paid, plus qualifying capital improvements over the years (an addition, a new roof, a renovated kitchen), minus any depreciation you claimed if the home was rented at any point. Routine repairs and maintenance do not add to basis; keeping receipts and records for purchase costs, improvements and any depreciation claimed is what makes this calculation defensible at sale time, which is exactly the kind of record a second-home owner tends to lose track of over a decade of ownership.
What are the 2026 capital gains brackets?
Gain on a property held over a year is long-term and taxed at the following federal brackets for 2026, per the IRS's annual inflation adjustments:
| Filing status | 0% up to | 15% from / to | 20% above |
|---|---|---|---|
| Single | $0 to $49,450 | $49,450 to $545,500 | $545,500+ |
| Married filing jointly | $0 to $98,900 | $98,900 to $613,700 | $613,700+ |
| Head of household | $0 to $66,200 | $66,200 to $579,600 | $579,600+ |
| Married filing separately | Not included here. This figure was not returned by a source this guide could independently confirm this session; it is typically close to half of the married-filing-jointly thresholds, but that is not stated as fact. Confirm directly against the IRS's Revenue Procedure for 2026 inflation adjustments before relying on a specific number. | ||
What is the 3.8% NIIT?
The Net Investment Income Tax under IRC 1411 adds a further 3.8% surtax on the lesser of your net investment income or the amount your modified adjusted gross income exceeds a fixed threshold. Gain from selling a second home you did not live in as your principal residence generally counts as investment income for this purpose. The thresholds are fixed by statute, not inflation-indexed, and have not changed since the tax took effect in 2013:
| Filing status | MAGI threshold |
|---|---|
| Single / head of household | $200,000 |
| Married filing jointly | $250,000 |
| Married filing separately | $125,000 |
Does the Section 121 exclusion apply to a second home?
Section 121 lets a homeowner exclude up to $250,000 of gain ($500,000 married filing jointly) on the sale of a principal residence, provided you owned and used it as your main home for at least 2 of the 5 years before the sale (the 2 years need not be consecutive). A property that was purely a second home or vacation home for its entire ownership period, and never your principal residence, does not qualify for this exclusion at all.
A more common situation is a home that was a second home or a rental for part of its life and later became your principal residence, or the reverse. For any period after 1 January 2009 that the home was used as something other than your principal residence, a "nonqualified use" ratio proportionally reduces the amount of gain eligible for exclusion, regardless of the overall $250,000/$500,000 cap:
NonqualifiedUseRatio = NonqualifiedUseDays ÷ TotalOwnershipDaysAfter2008
ExcludableGainReduction = TotalGain × NonqualifiedUseRatio
That reduced portion is not eligible for the exclusion even if the total gain is under $250,000 or $500,000. One helpful carve-out: the "trailing period" after the last day you used the home as your principal residence, within the 5-year lookback window before sale, does not count as nonqualified use, so a short gap between moving out and selling does not automatically hurt you.
What is unrecaptured Section 1250 gain?
If you depreciated the home as a rental at any point, straight-line over the 27.5-year residential rental recovery period with a mid-month convention, part of your gain at sale equal to the depreciation you actually claimed (or were entitled to claim) is not taxed at the ordinary 0/15/20% long-term rates. Instead, that slice is "unrecaptured Section 1250 gain," taxed at a maximum rate of 25%, applied before the remaining gain is taxed at the regular capital-gains brackets above.
Why can't I do a 1031 exchange on my vacation home?
A 1031 like-kind exchange defers gain only on property held primarily for investment or business use, not a home held for personal enjoyment. A vacation home used purely as a personal second home, with no rental history, does not qualify no matter how the transaction is structured.
The IRS published a safe harbor in Revenue Procedure 2008-16, effective for exchanges on or after 10 March 2008, describing how a mixed-use vacation property can still qualify. In each of the two 12-month periods immediately before the exchange (for the property given up) and immediately after the exchange (for the property received), the property must be: rented at fair market rent for at least 14 days, and used personally by the owner for no more than the greater of 14 days or 10% of the days it was actually rented at fair value. Meeting the safe harbor is not automatic eligibility, it is a description of facts the IRS has said it will not challenge; a purely personal vacation home with no rental history at all falls outside it entirely.
State tax note
States generally tax capital gains from a home sale as ordinary income under their own separate rate schedules, which vary widely and are outside the scope of this federal-focused guide. Some states with no general income tax do not tax the gain at all at the state level, while others tax it at the same graduated rates as wages. Check your specific state's department of revenue for the applicable treatment, since it is not covered by any of the federal figures above.
Work out your own numbers
- Second-home capital gains calculatorEstimate federal tax due on a sale, including NIIT.
- Vacation-home running-cost calculatorTrack what you have spent to keep basis records straight.
- Family property cost splitWork out shares among co-owners before or after a sale.
Common questions
If I move into my second home before selling, do I get the full exclusion?
Not automatically. You still need to meet the 2-of-5-years principal-residence test, and any period after 1 January 2009 when the home was not your principal residence counts as nonqualified use, which proportionally reduces the excludable gain even after you move in and qualify on the ownership-and-use test.
Does depreciation recapture apply even if I never claimed depreciation?
Unrecaptured Section 1250 gain is based on depreciation "allowed or allowable," meaning it can apply to depreciation you were entitled to claim during a rental period even if you did not actually claim it on your return, which is one reason accurate records of a property's rental history matter.
What is the difference between the NIIT threshold and the Section 121 exclusion?
They are separate and can both apply. Section 121 excludes qualifying gain from taxable income entirely if you meet its ownership-and-use test; NIIT is a 3.8% surtax on whatever net investment income, including any non-excluded gain, remains once your MAGI exceeds the fixed threshold for your filing status. A sale can trigger NIIT even where Section 121 partially applies, on whatever portion of the gain is not excluded.
Sources
- Tax Foundation, 2026 Tax Brackets (cross-check of IRS Rev. Proc. 2025-32), checked 15 September 2026.
- IRS, About Form 8960, Net Investment Income Tax, checked 15 September 2026.
- IRS Publication 523, Selling Your Home, checked 15 September 2026.
- IRS Publication 946, How to Depreciate Property, checked 15 September 2026.
- IRS Instructions for Schedule D, unrecaptured Section 1250 gain, checked 15 September 2026.
- IRS Revenue Procedure 2008-16 (hosted copy), checked 15 September 2026.
Last reviewed 15 September 2026. Next review March 2027. Written by the OwnersLog team from the official sources listed above. No professional reviewer is named on this page yet. Married-filing-separately capital gains brackets are not included above pending direct primary-source confirmation.
This guide is general information about how the rules work, not financial, tax, legal or mortgage advice, and it cannot account for your circumstances. Confirm anything that matters with a qualified professional. See the full disclaimer.