A vacation home is nice to have. Many vacation homes are owned for years–if not decades. The capital gains tax can be substantial when the owner goes to sell the property. And unlike a primary residence, the $250,000 or $500,000 gain exclusion under Section 121 is not available for a property that was never the owner’s principal residence. So every dollar of gain can be taxable.
One way to reduce the gain is to allocate part of the sale procees to the furnishings inside the property. The idea is that when a furnished property sells for a single lump-sum price, not every dollar of that price necessarily represents the value of the real estate. Some portion may reflect what the new buyer paid for the furniture, appliances, and décor that come with it. If the owner allocates part of the sale price to those items, the amount realized on the real estate drops—and so does the taxable gain.
What makes this work is that furnishings typically sell for far less than what the owner originally paid for them. Used furniture depreciates quickly. A sofa that cost $3,000 in 1994 is not worth $3,000 in 2015. So when a portion of the sale price is allocated to furnishings, the owner will almost always show a tax loss on the personal property side of the transaction. That loss does not increase the real estate gain, and importantly, it does not get added back in. The loss is simply nondeductible because the items were held for personal use. The net effect is that the owner has shifted dollars away from taxable real estate gain and into a loss that costs nothing in tax…