Selling a Second Home in North Carolina: A Friendly Guide to Capital Gains Taxes

Thinking of selling your vacation cabin or rental beach house in North Carolina? It’s important to understand how capital gains taxes will affect your sale. When you sell a second home (one that’s not your primary residence), both the IRS and the State of North Carolina may claim a piece of your profit. Don’t worry – this guide will walk you through the rules in plain English, explain federal vs. state taxes, and share strategies to reduce or defer what you owe. We’ll even run through a sample calculation so you know what to expect.

Federal Capital Gains Tax Basics (Second Home Sales)

When you sell a capital asset like a second home for more than you paid, the profit is called a capital gain . If you sell for less than you paid, that’s a capital loss. The IRS divides capital gains into two buckets, depending on how long you owned the property:

• Short-term capital gains: Apply if you owned the home one year or less. These gains are taxed as ordinary income at your regular federal income tax rate . That means they’re taxed just like your salary or wages, up to the top bracket (which can be as high as 37% federal tax) . So, flipping a house quickly can lead to a hefty tax bill.
• Long-term capital gains: Apply if you owned the home more than one year before selling. These gains get special lower tax rates. In 2025, long-term gains are typically taxed at 0%, 15%, or 20%, depending on your income level. Most middle-income taxpayers pay 15%, while high earners pay 20%. (For example, a married couple with taxable income up to about $600,000 would pay 15% on long-term gains, and above that income the rate goes to 20%.)

In addition, very high-income taxpayers might owe an extra 3.8% Net Investment Income Tax (NIIT) on capital gains . The NIIT kicks in if your modified adjusted gross income is above $200,000 (single) or $250,000 (married filing jointly), as of current law.

Key takeaway: To get the friendlier long-term capital gains rates, try to own your second home for over a year before selling . Selling in under a year can push your federal tax rate up dramatically, since the profit is treated like regular income.

No $250k/$500k Exclusion for Second Homes (Unless You Convert)

You may have heard that when you sell your primary home, the IRS lets you exclude a big chunk of the gain – up to $250,000 if you’re single or $500,000 if married – from taxes. This is true only for your main home that you lived in for at least 2 of the last 5 years.

For a second home (vacation house or rental property), this exclusion usually does not apply . In other words, the profit from selling a second home is fully taxable since it wasn’t your primary residence. The IRS doesn’t let you exclude the gain because you didn’t meet the “2-out-of-5 year” use test in that property .

Is there a way around that? One strategy is converting your second home into your primary residence for a period of time. If you move in and live there for at least 2 years out of 5 before selling, you could then qualify for the $250k/$500k exclusion. However, be aware of two limits:

• Non-qualifying use rule: Congress closed a loophole in 2009. If you first used the home as a rental or vacation property and then convert it, you can’t exclude the portion of the gain that corresponds to the time it was a second home after 2008 . In simple terms, the tax-free exclusion will be prorated – you’ll still owe tax on the period it was not your residence. For example, if you owned a house for 5 years, rented it for 2 years and lived in it for 3, about 40% of the gain might remain taxable despite the move-in .
• Depreciation recapture: (This matters if the home was a rental – more on this below.) Any depreciation you claimed while it was rented cannot be excluded by converting to a residence. You must pay tax on that portion, even if you meet the residency test . Converting to a primary home only shelters the non-depreciation gain.

In summary, don’t count on the full $250k/$500k exclusion for a second home unless you truly made it your main home and plan carefully. For most pure second home sales, assume the entire gain is taxable by the IRS. We’ll cover strategies like converting to a primary residence in more detail later.

North Carolina Taxes on Capital Gains from a Home Sale

In addition to federal tax, you need to consider North Carolina state tax on your sale. North Carolina is straightforward: it taxes capital gains as regular income at a flat state income tax rate. There’s no special lower rate for long-term gains at the state level – everyone pays the same flat percentage on all income, including investment profits.

• Current NC rate: For tax year 2025, North Carolina’s flat income tax rate is 4.25%. (It was 4.5% in 2024 and is scheduled to gradually drop to 3.99% by 2026 under current law.)
• So, capital gains = 4.25% NC tax: If you have a taxable gain from selling a property in 2025, you’ll owe North Carolina 4.25% of that gain, regardless of whether it was short-term or long-term. For example, if your profit is $50,000, the NC tax would be about $2,125. This is on top of your federal capital gains tax.
• No primary home exclusion for NC: Note that North Carolina does not have a special exclusion for home sales. The federal $250k/$500k exclusion affects your federal taxable income (and thus carries to state via your AGI), but there’s no separate state-only exclusion. In practice, if your gain is fully excluded federally (by Section 121), it won’t show up as taxable income to NC either. But if it’s taxable federally, NC will tax it too.
• Residency doesn’t matter for the property’s state tax: If the property is in North Carolina, the gain is taxable by NC even if you live out of state. According to tax experts, a capital gain on real estate is taxable by the state where the property is located, whether you’re a resident or not. So a Floridian selling a North Carolina vacation home still owes NC’s 4.25% on the gain. In fact, NC (like many states) may require non-resident sellers to pay an estimated tax withholding at closing to ensure it gets its cut. If you’re a NC resident, you’ll just report the gain on your NC state tax return as part of your income.
• Bottom line: Be prepared for that ~4.25% NC tax hit on your profit. North Carolina’s rate is relatively low (and decreasing), but it does apply to your home sale gain just as it would to any other income. Unlike some states with no income tax or special capital gains breaks, NC will tax your real estate gain the same as your salary or other earnings.

Calculating Your Gain: Cost Basis 101 (and Depreciation Recapture)

Before we dive into strategies to reduce taxes, let’s make sure you know how to calculate the capital gain on your home sale. In simple terms:

Capital Gain = Amount you sell for – Your “Adjusted Basis” in the home.

Adjusted Basis is basically what you invested into the property. It starts with what you paid for the home (the purchase price), and then you add the cost of major improvements you made. For example, adding a new roof, a room addition, or renovated kitchen – these capital improvements increase your basis. Certain closing costs and purchase expenses can also increase basis.

• Improvements vs. repairs: Only improvements that add value or extend the life of the home count. Fixing a leaky faucet or repainting for maintenance is generally not added to basis. (Those are just expenses, not capital improvements.) From that total, if the home was a rental property, you must subtract any depreciation you claimed for tax purposes . Depreciation deductions lower your basis. (If it was never rented out, you didn’t depreciate it, so no subtraction needed.)

Also, you can subtract any casualty losses (like if you claimed a loss for storm damage or fire) and certain credits if they affected basis, but those are less common.

After figuring your adjusted basis, calculate the amount you realized from the sale: this is basically the selling price minus any selling costs (like realtor commissions, legal fees, transfer taxes, etc.). Many people simply take the gross selling price, but remember you get to deduct the costs of selling – that effectively reduces your gain.

Finally: Gain = (Selling Price – Selling Expenses) – Adjusted Basis.

Let’s break that down with a quick example of a second home sale calculation:

• Purchase Price: $200,000 (what you originally paid for the vacation home).
• Improvements: $50,000 (you added a new deck, remodeled the kitchen, etc., over the years).
• Adjusted Basis: $250,000 in total. (This is $200k + $50k. We assume no prior depreciation in this example; see the rental scenario below if you did rent it out.)
• Selling Price: $350,000 (what the buyer pays you for the home now).
• Selling Costs: $20,000 (for a real estate agent’s commission and closing costs).
• Net Proceeds: $330,000. (That’s $350k minus $20k in selling expenses. This is effectively the amount you “realized” from the sale.)
• Capital Gain: $80,000. This is the amount that will be subject to taxes. It’s calculated as $330k (net sale) – $250k (basis) = $80k.

Now, how is that $80,000 taxed? We’ll assume you owned the home for several years, so it’s a long-term gain:

• Federal Tax (long-term capital gains): Let’s say your income puts you in the 15% capital gains bracket. The federal tax on $80k would be 0.15 × $80,000 = $12,000. (If you were a very high earner, part of it might be at 20%, but for most folks 15% applies. And if your other income was low, part of the gain could even fall in the 0% bracket – but we’ll stick with 15% for this illustration.) If this had been a short-term sale (owned <1 year), that $80k would be taxed at your ordinary income rate – for example, a 24% federal bracket would mean $19,200 tax, much higher than $12,000. That shows why holding the property for at least a year is valuable .
• North Carolina State Tax: The state tax on the gain is flat 4.25%. So, 0.0425 × $80,000 = $3,400 in NC tax. (If this was 2024, it would’ve been 4.5%, or $3,600.) You’ll report the gain on your NC tax return and pay this amount, or if you’re an out-of-state owner, NC might have withheld some at closing.
• Total Tax Hit: In this example, about $15,400 total. That represents $12k (federal) + $3.4k (NC). This is roughly 19% of your $80k gain going to taxes. The remaining profit is still yours to keep.

Now, consider if this home had been a rental property for some time and you took depreciation deductions on it. Let’s say out of that $50k improvements, or in addition to it, you also depreciated $20,000 over the years as a rental. This would lower your adjusted basis to $230,000 ($250k minus $20k). Then your gain would actually be $100,000 ($330k – $230k). Importantly, the IRS says the portion of gain from depreciation ($20k in this case) is taxed at a special 25% rate – this is the depreciation recapture we mentioned. The remaining $80k of gain would still get the 15% rate. Here’s how that would break down:

• Federal tax on the $20k depreciation portion at 25% = $5,000.
• Federal tax on the other $80k at 15% = $12,000.
• NC state tax on the full $100k at 4.25% = $4,250. (NC doesn’t give a lower rate for depreciation; it’s all just income.)
• Total = $21,250 in tax on $100k gain. Notice the extra $5k due to depreciation being recaptured at 25% instead of 15%. The lesson: if you claimed depreciation on a second home (common for rental properties), budget for that 25% recapture tax on that portion when you sell. You can’t avoid that by converting to a residence either – it must be paid even if you qualify for the home exclusion .

Calculate your gain by subtracting your purchase price (plus improvements) from the net selling price. Know that long-term gains get taxed at 0-20% federally (typically 15% for many), while short-term gains get hit at your regular bracket (potentially much higher) . North Carolina will also tax the gain at 4.25%. And if the home was a rental, remember the special 25% tax on any depreciated amount. Now let’s explore ways you might reduce these taxes.

Strategies to Reduce or Defer Capital Gains Tax

Selling a second home can come with a sizeable tax bill, but smart planning can soften the impact. Here are some homeowner-friendly strategies to consider:

1. Prioritize Long-Term Gains

As mentioned, owning the property for more than one year before sale is one of the simplest tax-reduction strategies. By doing so, you ensure your gain is taxed at the long-term capital gains rates, which are much lower than ordinary income rates . For most people, this means a 15% federal tax instead of what could be 22%, 24%, or even 32%+ if it were short-term. If you’re close to that one-year mark, it can pay (literally) to wait a few more months to hit a year and a day of ownership.

2. Bump Up Your Basis (Track Those Improvement Receipts)

Every dollar added to your cost basis is a dollar less of taxable gain. So, keep good records of any capital improvements you made to the property – renovations, new HVAC system, additions, etc. When it’s time to sell, list those improvements and include their costs in your basis. For example, if you put $30,000 into upgrading the property, that could save you from paying tax on $30,000 of gain. At a 15% federal rate and 4.25% state, that’s about $5,775 in combined tax savings, just for documenting what you put into the house.

Also, don’t forget to deduct legitimate selling costs from your sale proceeds. Real estate agent commissions, attorney fees, title insurance, transfer taxes – all these directly reduce your gain (they’re not tax “deductions” per se, but they reduce the amount of the sale price that’s taxable). The IRS essentially lets you treat these as reducing the sale price. Make sure your tax preparer or software knows the net proceeds after those expenses.

Routine repairs or maintenance (like fixing a faucet, repainting a room, mowing the lawn) do not increase your basis; they can’t be used to reduce the gain . Only improvements that add to the value or lifespan of the property count.

3. Consider a 1031 Exchange (Tax Deferral)

If your second home was primarily an investment or rental property (not just personal use), you might be able to use a 1031 exchange to defer the capital gains tax. A Section 1031 like-kind exchange allows you to swap one investment property for another without immediately recognizing the gain in taxes . Essentially, you reinvest the sale proceeds into a new property, and the IRS lets you postpone paying tax until you sell the replacement property down the road. The new property takes over the old property’s basis, carrying the deferred gain forward .

However, important caveats for second homes: To qualify for a 1031 exchange, the property must be held for business or investment purposes . A pure vacation home that you use for personal enjoyment usually won’t qualify . If you occasionally rented it out or can otherwise show it was an investment, it might qualify, especially if personal use was limited (IRS safe harbor guidelines require limited personal use, per Rev. Proc. 2008-16). But if it was mainly for your family’s fun, you can’t 1031 exchange it – primary residences and second homes for personal use are explicitly excluded from like-kind exchange treatment .

If you do go the 1031 route (for an investment property sale), be prepared to follow strict timelines: you generally have 45 days to identify the new property after selling the old one, and 180 days to complete the purchase . Also, to defer all tax, you need to reinvest 100% of the net sale proceeds into the new property of equal or greater value . Partial exchanges where you keep some cash (“boot”) will trigger tax on that portion.

Takeaway: A 1031 exchange can be a powerful tool to defer capital gains (and depreciation recapture) taxes by continuing your investment in another property. But it’s only for investment properties – not a second home you mainly lived in or vacationed in . If you’re in the grey area (mixed personal and rental use), consult a tax advisor to see if you meet the qualifying use standards.

4. Offset Gains with Losses (Tax-Loss Harvesting)

If you have other investments, you can use tax-loss harvesting strategies to offset the gain from your home sale. Tax-loss harvesting means selling other assets at a loss to produce capital losses that you can use against your gains . For example, maybe you have stocks or mutual funds that dropped in value – selling them in the same year as your home sale could generate a capital loss that reduces your net gain. Capital losses will first offset capital gains dollar-for-dollar . If you have more losses than gains, you can also deduct up to $3,000 of excess losses against your ordinary income each year and carry forward the rest.

A few points to remember:

• The losses have to be realized (you actually sell the asset at a loss). Paper losses don’t count .
• Watch out for the wash sale rule if you plan to rebuy investments sold for a loss (it disallows the loss if you repurchase a substantially identical asset within 30 days).
• You cannot create a deductible loss on the sale of personal-use real estate. So if your second home sale itself is at a loss (sold for less than you bought), unfortunately that loss is not deductible in most cases. (If it was purely an investment rental property, a loss could be deductible as a capital loss, but personal second home losses are not.) The harvesting idea is more about using other losses in your portfolio to offset the gain on the home sale.

In short, if you’re facing a large gain, check your other investments for opportunities to harvest losses. Selling underperformers before year-end could save you some tax on the home sale profit .

5. Time Your Sale Wisely

Timing can make a difference in several ways:

• Tax-year timing: If you’re near the end of a calendar year, consider whether it’s better to close the sale in December versus January. For instance, if you had unusually high income this year (pushing you into a higher capital gains bracket or triggering NIIT), but expect lower income next year, deferring the sale into the new year could mean a lower tax rate on the gain. Conversely, if your income will jump next year, you might prefer to recognize the gain this year. Essentially, be mindful of which tax year the gain will fall in and what your overall income picture looks like for that year.
• Low-income years: If you are retiring or have a year with low income, you might even qualify for the 0% federal capital gains rate on at least part of your gain (for 2025, roughly the first $48k of taxable income for singles, $96k for couples is in the 0% bracket for long-term gains). Spreading the sale or payments across years (if using an installment sale, for example) might keep your income in lower brackets each year.
• North Carolina rate changes: North Carolina’s tax rate is scheduled to drop slightly over the next couple of years (to 3.99% by 2026). The difference isn’t huge (4.25% vs 3.99%), but on a very large gain, waiting until the rate dips could save a bit. Of course, market conditions and other factors usually outweigh a 0.25% tax rate difference, so don’t let the tail wag the dog. But it’s worth noting that NC’s rate is trending down.

Additionally, from a non-tax perspective, timing the sale with the real estate market (selling in a strong market) may increase your profit, which could more than compensate for any tax rate differences. Just weigh the pros and cons.

6. Gifting or Transferring the Property

Another approach sometimes considered is gifting the property to a family member instead of you selling it outright. The idea here is that you, as the donor, wouldn’t pay the capital gains tax – because you didn’t sell it, you gave it away. The property would carry over your cost basis to the family member . When they eventually sell, they’ll have to pay the capital gains tax (unless they convert it to a primary residence and use the exclusion, or employ other strategies).

Why do this? Possible reasons:

• If your family member (say, an adult child) is in a much lower tax bracket, they might pay a lower capital gains rate when they sell in the future. In fact, if their income is low enough, they might pay 0% on long-term gains up to a certain amount.
• Gifting can also be part of estate planning, to remove the asset (and future appreciation) from your estate. You’re basically transferring the tax obligation to your heirs, potentially at a lower rate for them .

The recipient gets your original basis (“carryover basis”), so no tax is avoided, it’s just deferred. Also, large gifts can have gift tax implications if over the annual exclusion and your remaining lifetime exemption. As of 2025, you can give $19,000 per year per donee without even having to file a gift tax return (the property likely exceeds that, so you’d be using part of your lifetime exemption, which is very high – over $13 million – so most people won’t actually owe gift tax, but paperwork might be required).

In summary, gifting the second home is a way to potentially avoid paying the tax yourself, but it’s really a deferral/transference of the tax rather than an absolute saving. A quote from a financial advisor sums it up: transferring assets to family can allow you to avoid paying the gains tax now, but “your heirs will be subject to capital gains tax when they sell the holding” . So think of it as a strategy to help the next generation (or to let them handle the sale). If your kids were planning to keep the property long-term or move into it, it could make sense. Just be sure to get professional advice on the gift tax and estate planning side.

(Side note: Inheriting is different from gifting – if your heirs inherit the property after your death, they would get a step-up in basis to the current market value, potentially owing no capital gains tax if they sell right away. That can be a huge tax advantage of holding until death vs. gifting or selling during life. Estate planning is beyond our scope here, but it’s something to bear in mind for highly appreciated property.)

7. Converting to a Primary Residence

We touched on this earlier, but let’s revisit with strategy in mind. If you have a second home that has appreciated significantly, moving into it for a period could unlock the primary-home exclusion and save a lot on taxes. Here’s how to approach it:

• You’d need to make the home your main residence for at least 2 years before selling (and ensure you haven’t used the $250k/$500k exclusion on another home sale in the last 2 years).
• This could be particularly useful if, for example, you’re planning to downsize or retire. You might move into the vacation home full-time, establish it as your primary residence, then after 2+ years, sell it and take advantage of up to $250k (single) or $500k (couple) tax-free gain.
• Plan for the limitations: As discussed, any depreciation claimed while it was a rental is still taxable at 25% . And if the property was used as a second home (not primary) after 2008, a proportional share of the gain will be taxable even after conversion . The longer you use it as your primary home relative to its past use, the better your exclusion outcome.
• This strategy works best if you have a large gain and can truly commit to living in the home for a few years. It essentially turns a second home sale into a tax-favored primary home sale.

For example, suppose you have a lake house with $300k of appreciation. If you sell now as a second home, you’re looking at potentially ~$45k+ in combined taxes. If you move in and make it your main home for two years, then you might exclude $250k of that gain entirely (if you’re single; $500k if married). Any remaining gain above that would be taxed, but you’ve significantly cut down the taxable amount. Just remember the proration rule for non-qualified use (so if it was a rental for years, you might not get to exclude the full $250k).

In any case, converting to a primary residence is one of the few ways to outright avoid capital gains tax on a second home, but it requires time and lifestyle changes. It’s not for everyone, but it can be very powerful if it aligns with your plans.

Combining strategies can yield even better results. For instance, you might convert a rental to a primary residence and do some tax-loss harvesting with stocks in the year of sale to cover any taxable portion left. Or time the sale in a year you’re in a lower bracket. Each homeowner’s situation is unique, so consider consulting a tax professional or financial advisor to map out the best approach for you.

Case Study:

Selling a North Carolina Vacation Home

 – Putting It All Together

Let’s walk through a realistic scenario to see how all these rules and strategies play out for a North Carolina homeowner:

Meet the Homeowners: John and Jane Doe own a mountain cabin in Hayesville, NC (Clay County) that they used as a family vacation home. They bought it in 2015 for $200,000. They did some significant upgrades over the years (about $50,000 worth of improvements). They have never rented it out – it’s been purely for their personal use, so no depreciation was taken. Now in 2025, they decide to sell the cabin for $350,000.

Step 1: Calculate the Gain

• Purchase price (2015): $200,000
• Improvements: $50,000 (new roof, deck expansion, finished basement, etc.)
• Adjusted basis: $250,000 . (We assume they kept good records of improvements.)
• Selling price (2025): $350,000
• Selling expenses: $20,000 (6% agent commission + closing costs)
• Net amount realized: $330,000
• Capital gain: $330,000 – $250,000 = $80,000 gain.

Step 2: Determine Federal Tax

John and Jane owned the cabin for 10 years, so it’s a long-term capital gain. Based on their other income, let’s suppose their taxable income including the gain puts them in the 15% federal capital gains bracket (which in 2025 goes up to ~$600k for a married couple). They also don’t trigger the NIIT (they’re below $250k income aside from the sale). Thus:

• Federal long-term capital gains tax = 15% of $80,000 = $12,000.

(If John and Jane had very high incomes, part of that $80k could be taxed at 20% instead. Conversely, if their income was low, a portion could be 0%. We’ll stick with 15% for simplicity.)

Step 3: Determine North Carolina Tax

North Carolina will tax the $80,000 gain at the flat 4.25% rate (for 2025).

• NC tax = 4.25% of $80,000 = $3,400.

John and Jane will report the sale on their federal 2025 tax return (Schedule D and Form 8949) and also include the capital gain in their North Carolina state return. Since they are NC residents, they pay the tax with their annual filing (if they were out-of-staters, the title company likely withheld an estimated amount at closing).

Total Tax: $12,000 + $3,400 = $15,400.

That’s the raw tax outcome. Now, let’s see if John and Jane could have done anything differently to reduce this:

• They already owned it long-term, which saved a lot (imagine if that $80k was short-term at, say, a 24% bracket = ~$19k federal tax instead of $12k).
• Could they have avoided any tax? Since it was never their primary residence, they don’t qualify for the $250k exclusion – so no immediate way to avoid tax on this as a second home. If a time machine existed, one idea would be: they could have moved into the cabin as their full-time home for 2 years before selling. Then $80k gain would be entirely tax-free (under the $500k married exclusion). However, that only makes sense if they were able and willing to relocate for that period.
• What if the Does had other investment losses? Say 2025 was a rough year in the stock market and they had $20,000 of capital losses from selling some stocks. Those losses would first offset $20k of the cabin’s gain, reducing their taxable gain to $60k. Then their federal tax would be 15% of $60k = $9,000, plus NC 4.25% of $60k = $2,550. Total ~$11,550. So harvesting losses could have saved them around $3,850 in taxes in this scenario.
• If the cabin had been a rental property, let’s tweak the case: Suppose instead that John and Jane rented it out for several years. They might have claimed $30,000 of depreciation. That would make their basis $220k (200+50-30). Gain would be $110k. The $30k depreciation portion would be taxed at 25%. So federal tax = $30k×25% + $80k×15% = $7,500 + $12,000 = $19,500. State tax = 4.25% of $110k = $4,675. Total ~$24,175. That’s considerably higher due to depreciation recapture. If they wanted to avoid that, they could do a 1031 exchange into another rental property instead of a direct sale.

By trading into a new investment property, they’d defer the $110k gain (including depreciation recapture) entirely . They’d have to follow the 45-day/180-day identification and purchase rules, and invest all proceeds into the new property . This way, they pay $0 tax in 2025. The catch: whenever they eventually sell the new property without another exchange, those deferred gains will tax out. But who knows – maybe they keep exchanging until they eventually leave property to their heirs, who get a step-up in basis (wiping out the gain for taxes). That’s a long-term deferral strategy many real estate investors use.

Could gifting have helped? If John and Jane had gifted the cabin to their daughter instead of selling it themselves, they would owe no tax on the transfer (a gift isn’t a sale). Their daughter’s basis would be $250k and she might immediately sell for $350k, realizing the same $100k gain we calculated (if she sells right away, she wouldn’t meet 2 years for exclusion, so fully taxable to her). If the daughter’s own income is low, she might pay 0% on some of it and 15% on the rest, potentially saving some federal tax compared to the parents’ $12k.

However, that’s a bit contrived – more realistically, the benefit of gifting would be if the daughter planned to move in and later qualify for the exclusion, or if John and Jane were trying to reduce their estate. For most homeowners, outright gifting to avoid the capital gain isn’t done unless there’s a larger estate plan at play, because it doesn’t eliminate the tax, it just passes it to someone else (and could trigger paperwork for gift tax if the value is high, though under current law no actual gift tax would be due thanks to the multi-million dollar exemption).

This case study highlights the main points: calculate your gain accurately, utilize long-term rates, and consider your unique situation for any opportunities to save. John and Jane’s $80k gain was straightforward and they paid their 15%/4.25% happily. If your numbers are larger, the stakes for planning are higher – you’d want to employ more of these strategies.

Final Thoughts

Selling a second home in North Carolina involves a mix of federal and state tax rules, but it doesn’t have to be overwhelming. The key things to remember are:

• Federal capital gains tax will apply – make sure you know if your gain is short-term or long-term, and that second homes don’t get the big exclusion that primary homes do (unless you convert them).
• North Carolina will tax your gain at the flat income tax rate (around 4%–5%), since it treats capital gains like ordinary income.
• There are no magic loopholes to completely erase a second home’s gain (other than converting it to a primary residence or doing a 1031 exchange for investment property), but there are lots of strategies to minimize the tax bite – from simply waiting a year to sell, to offsetting gains with losses, to careful timing and record-keeping, to potentially gifting or exchanging the property.

Always factor in depreciation recapture if the home was a rental – that 25% rate on past depreciation can surprise unwary sellers. And keep an eye on your overall income in the sale year, since that drives the tax rate.

Most importantly, plan ahead. Taxes shouldn’t be the only reason to sell or not sell, but understanding the implications can help you decide when and how to sell to your maximum advantage. Before finalizing the sale of a second home, it’s wise to talk with a tax professional, especially if you have a large gain or complicated factors. They can personalize these strategies to your situation and ensure you comply with all rules (for example, properly executing a 1031 exchange or correctly reporting a conversion to personal use).

Selling your second home is a big financial move. By being informed about capital gains taxes, you can approach the sale confidently and strategically, keeping more of your hard-earned profit in your pocket. Happy selling, and may your next adventure – whether it’s a new home or another investment – be a great success!

Sources:

• Internal Revenue Service – Topic No. 701: Sale of Your Home (Primary residence exclusion rules)
• Internal Revenue Service – Tax Topic 409: Capital Gains and Losses (holding period and tax rate basics)
• Tax Policy Center – “How are capital gains taxed?” (short-term vs. long-term rates)
• NerdWallet (2025 Capital Gains Tax Rates) – long-term capital gains brackets for 2025
• Bankrate – “Capital gains tax rate on real estate” (depreciation recapture at 25% for rental property)
• North Carolina Dept. of Revenue / AARP – NC taxes capital gains at flat income tax rate (4.5% in 2024, 4.25% in 2025)
• TurboTax/Intuit Community – confirmation that NC taxes non-resident sellers on NC property gains
• IRS Publication 523 / Nolo Legal Encyclopedia – rules for converting a rental to a personal residence and limitations (post-2008 nonqualifying use, depreciation must be recaptured)
• IRS Fact Sheet FS-2008-18 – Like-Kind Exchange rules (personal-use second homes do not qualify for 1031)
• Kiplinger – 1031 exchange overview (deferring tax by swapping properties, new property assumes old basis)
• H&R Block Tax Tips – explanation of tax-loss harvesting to offset capital gains
• Charles Schwab – Gifting appreciated assets to family (donor avoids tax, donee takes on gain with carryover basis)