How Does a Capital Gains Tax Affect Selling Your Second Home?

Fenwick Island is a small coastal town on a barrier spit (a sandy land dune) in Delaware that houses nearly 400 residents with a median household income of approximately $69,000. It is known as one of the area’s three “Quiet Resorts” — the other two are Bethany Beach and South Bethany. Most tourists and revelers visit Ocean City, Maryland, which lies across the state line about 10 miles away.

The island separates the Atlantic Ocean from Little Assawoman Bay, while Ocean City, Maryland, sits at the peninsula's southern tip. And if you believe urban legends, the Delaware coast was well-known as a “secret” place for pirates to hide from the law.

As of December 2021, Fenwick Island homes sold for a median price of $1,390,000, which is about 6% lower than the previous year (when the median price was $1,474,950) and places the housing market in slight favor of buyers. A buyer’s market means that Fenwick Island real estate is readily available, including single-family homes and Fenwick Island luxury condos. Properties on average sell after being on the market for 113 days.

Homeowners of Fenwick Island real estate or Fenwick Island luxury condos will enjoy the town’s year-round events, which take place within its lush green spaces and beautiful shorefront. Residents attend the Island’s Annual Earth Day Clean-Up, the Annual Town Bonfire in July, and Fenwick Flicks, which brings movies on the beach in July and August.

The year-end holidays bring more celebrations, featuring an old-fashioned annual Turkey Trot on Thanksgiving, a community tree lighting and holiday gathering the Saturday after Thanksgiving, and the New Year’s Day tradition of the Fenwick Freeze — brave participants take a breathtaking dunk into the Atlantic Ocean. This bone-chilling event raises funds for the local beach patrol organization and is always a crowd favorite.

Whether you live on Fenwick Island and are looking to upsize or downsize or are selling a second home elsewhere to relocate to the island, it’s critical that you understand capital gains tax basics and how they can affect that sale. Not doing your homework could cost you unnecessary fees. Here are some helpful tips.

Capital gains tax basics

First, if you have lived in your home — that is, a house, townhouse, or Fenwick Island luxury condo that you have purchased — for two of the previous five years, you’ll end up owing little to no taxes on the sale of that dwelling given that it has been your primary residence. In other words, timing is everything.

For example, imagine you are a single person who owns Fenwick Island real estate in the form of two houses: a large one and a smaller one, which you purchased simultaneously. You live in the smaller of the two houses and decide to upsize to the larger home and earn rental income from the smaller home.

When you’ve lived in the larger home for more than four years, you decide that being a landlord is a bit of a headache and stop renting the smaller house so you can move back into it. You also decide to downsize overall and sell the larger home. Since the initial purchase, both places have appreciated by roughly $238,000 each in the four years.

Here’s the problem: You’ve waited too long to sell the house. If you had sold the smaller property within the three-year window and lived in it for at least two years, you would be faced with little to no capital gains tax. You would only owe tax on your sales profit equal to the depreciation you deducted in the years you rented out the house.

Instead, due to not living in the house for more than three years, you are now liable for potentially tens of thousands of dollars in taxes on the sale because of its appreciated value.

Straight sales

A “normal” home sale, also known as a “straight” sale, is the most common type of home sale. Capital gains “caps” are equally as straightforward. A single person who’s lived in a home for two of the previous five years (as explained above) will not pay capital gains taxes as long as the sales profit does not exceed $250,000. That cap is doubled to $500,000 for married couples who file a joint tax return.

You’ll be liable for the capital gains tax rate if you exceed the profit caps, depending on your income tax bracket. These tax rates range from zero to 15% or 20%, and an accounting tax professional can help you determine your tax bracket.

The capital gains tax does not apply to the transaction if you lose money on a sale. Additionally, if you have multiple homes, for example, that are not your primary homes and that you’ve owned for at least one year, you’ll be liable for capital gains taxes of up to 15% on any profit from the sale.

State versus federal laws

The legal details we’ve explained thus far for capital gains taxes nationwide are federal laws. Individual states’ real estate laws mirror those federal laws with few exceptions. Part of your due diligence in selling your second home should include consulting a tax professional or meeting with an expert at the governmental department in the state where you live — assuming that’s where your property is located — to ensure proper, timely compliance.

Fenwick Island real estate agent Joseph Connor is eager to help you find the community to best fit your lifestyle. His team of professionals can help you craft the best offer and reduce your tax liability when capital gains taxes are involved. Contact Joseph today!

Work With Joseph

Finding your perfect home at the beach can be complicated, Joe will make it an enjoyable experience. Joe, a lifelong resident is in his thirty-fourth year of real estate practice in the State of Delaware; covering all 3 counties; New Castle, Kent, and Sussex, successfully.
Let's Connect
Follow Us