What are the state tax implications of selling my vacation home?

August 22, 2011

From:  Anonymous
Date:  Sun, 25 Feb 2007
Subject:  Capital Gains Tax

Mr. Gray,

My primary home is in Northern Virginia and I have a second home in North Carolina. If I sell the North Carolina home, which I've had less than two years, what are the state tax implications?

Also, can I accumulate days to meet the use test for a principal residence?

Thanks, in advance, for your information.

Answer

Date:  28 Feb 2007

Hello,

State tax issues are some of the most complex. Please consult with a local tax return preparer/advisor for help. The sale of the second residence will be taxable in both states. The maximum rate of tax in North Carolina is 8.25%; the maximum rate in Virginia is 5.75%. You will be entitled to a state tax credit on your Virginia income tax return for the North Carolina tax, but the credit will be limited to the Virginia tax with respect to the sale.

You can not accumulate days for the "use test" to determine if a sale is of a principal residence. The residence is tested each year. Generally, in order to qualify for the exclusion the residence must be a principal residence for two of the five years before the sale.

Be careful, because there are side effects of this situation, including possibly being taxed as a resident in more than one state.

Good luck!
Mike Gray

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