Capital gains tax is a factor that home investors in Central Florida need to consider when selling their Disney vacation homes. In part one of this series, we shared some of the ways you can reduce your capital gains tax liabilities such as by selling other assets, reduce your taxable income, and deduct common ownership expenses.
Making your short-term rental home your primary residence is another way to avoid most, if not all, capital gains taxes and get the most out of your holiday home investment.
Residency Requirements for Your Orlando Vacation Home
If you’ve been using your vacation home as a short-term rental property, you can start spending more time there as a way to make it your primary residence. Each state has its own residency requirements. In Florida, you’ll need to spend at least half of the year in the state if you plan to claim your vacation rental as your primary home.
If you’re an international real estate investor, your primary residence may be limited to your home country. Consulting with a real estate professional will help determine the best options for your situation.
Move into Your Florida Vacation Home
Moving into your second home full-time is another way to avoid capital gains taxes when you decide to sell it. It’s important to find out what criteria are necessary for a home to qualify as a primary residence. Typically, a residence is considered primary because it’s where you spend most of your time, it contains your personal belongings, and it’s where you collect mail. Another factor that generally applies is whether or not you use that address to register to vote.
This is a major decision, so you’ll have to consider the pros and cons since homeowners can only claim one home as their primary residence. Moving into your vacation home means you’ll no longer qualify for the tax exemptions and deductions for your original home, including mortgage interest deductions. You need to understand how moving into your second home will impact your other tax liabilities.
Keep in mind that you will need to live in your second home for at least two years, and you may still owe taxes for the period in which the property was not your primary residence. For instance, if you owned your second home for four years before moving into it on a permanent basis, 50 percent of your capital gains would be exempt.
Know What You Can Deduct When You Sell
When selling a primary residence in the US, a maximum of $250,000 of the profits can be excluded from taxable capital gains when filing as a single homeowner. Couples who file taxes jointly can exclude up to $500,000.
When you make your vacation home your primary residence, you can qualify for deductions like these to help you keep more of the return you make on the sale of your home.
Working with a skilled real estate professional is the first step to maximizing your home investment when it’s time to sell. Homeowners looking to sell their Disney vacation homes can take steps now to make those homes their primary residences and avoid capital gains taxes.
Team Donovan helps home investors buy and sell homes in the theme park area of Central Florida while helping you reach your investment and financial goals. If you want to learn more, contact us at 407.705.2616 to schedule a free, no-obligation consultation.