If you remember when a trip to your vacation property was a relaxing time with friends and family, you probably have owned it for a while. As the years wane on, the fun is replaced with trips that include maintenance and upkeep, paint brushes and lawnmowers. A sell decision gets easier as the “to-do” list gets longer. Chances are that you have accumulated real equity in the intervening years that can lead to tax upon sale.
Better to fully understand the tax consequences before sale then to realize to late that it could have been avoided. The use of the property can be changed and capital gains tax deferred if you plan two years in advance. There is no tax penalty to declare the property as investment/rental property. Keep good records, document the income and expenses and declare it on your tax return.
Rather than sell the property, exchange it for other investment/rental property in a new location that meets your anticipated needs. Rent the new property for the following two years. The property can be converted back to personal use if you desire, all without the payment of capital gains tax.
