Many taxpayers own vacation homes in the area where they eventually plan to retire. In this situation, a vacation home can prove to be a tax-advantaged retirement fund. After retirement, the primary residence can be sold, and up to $500,000 of gain is generally tax-free for married couples filing a joint return. Any additional capital gain is taxed at a maximum rate of 15%. The taxpayers would then move to their former vacation home and make it their permanent residence.

The tax-free home sale gain proceeds can be used as retirement funds versus withdrawals from a retirement account that are currently taxed at up to 35%. Once the taxpayers occupy their former vacation home for at least two years, they become eligible for an additional $500,000 exclusion on the sale of that home. Once again, the tax-free sale proceeds can be used as retirement funds.

Alternatively, the home can be passed on to the couple’s children or other beneficiaries.

Tax and Business Alert