The Vacation Home Tax Bomb: How Selling a $1 Million Cabin That Cost $300,000 Triggers a $132,000 Tax Bill Most Owners Never Plan For

"The exclusion that protects primary residence gains under IRC §121 does not apply here, as the cabin was never used as a principal residence. This means the full $700,000 long-term capital gain is now exposed to federal taxes with no shelter from the provision most homeowners instinctively rely on when selling."

"At the assumed income level, a $700,000 gain typically produces a 15% long-term capital gain rate for a married couple filing jointly. Combined, the effective federal rate on this gain runs to 18.8%, producing a federal tax liability of approximately $132,000 on the $700,000 gain alone."

"For example, California residents might face a state capital gain rate as high as 13.3%, which treats capital gains as ordinary income, potentially adding another $93,000 to the bill on a gain this size. Florida residents, on the other hand, will owe nothing at the state level."

Selling a family cabin after two decades can result in a substantial tax bill due to capital gains. A couple selling a property for $1 million, purchased for $300,000, faces a $700,000 gain. Unlike primary residences, vacation properties do not benefit from IRC §121 exclusions, exposing the entire gain to federal taxes. The effective federal tax rate can reach 18.8%, resulting in a liability of approximately $132,000. State taxes vary significantly, with California potentially adding $93,000, while Florida imposes no state tax. Depreciation recapture may further complicate tax obligations.

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