Tax Consequences of the Sale of Recreational Property

Selling a recreational property is often a complicated process with sometimes unusual legal complications. Among these are tax consequences, which can result especially in the case of certain real estate investments. At the same time, the sale of recreational property can also result in long-term savings from some kinds of taxes. Understanding the tax implications helps provide some context for decisions about selling a recreational property.

In most cases, a recreational property consists of real estate or recreational vehicles. For real estate, recreational property is not eligible for a number of important tax credits because it is usually a second home or auxiliary property to a primary residence. This is usually important just for purchases of real estate, which are offset in part for primary homes by access to credits or deductions. Recreational real estate is considered an investment for tax purposes, so it is subject to state and local property taxes as well as the capital gains tax if it accumulates value.

The major tax consequence of selling recreational real estate comes from the capital gains tax. This is a type of income tax levied by the federal government and states on any earnings that are realized from selling a recreational property for more than it cost to purchase. Capital gains tax applies to all land investments, though there is an exemption for primary residences that accumulate up to $250,000 in capital gains. To make things more complicated, taxpayers are not able to deduct capital losses on their taxes for recreational properties that they personally use -- these properties are considered personal-use properties and are not subject to capital losses.

Many states charge property taxes on recreational real estate in the U.S., usually as a percentage of assessed value. These taxes are paid annually by the landowner, as long as he holds the property, so selling a recreational property will result in annual savings from lowered property tax liability. Some states, though, charge a real estate transfer tax on the sale or disposition of a recreational property. According to the National Association of Realtors, "a majority of states and the District of Columbia provide for this tax but 13 states do not," and "the state statutes may or may not stipulate who (buyer or seller) is responsible for paying the tax."

Sales of non-real estate recreational property, such as an RV or a boat, can also have tax consequences. While these properties are usually not subject to an annual property tax, many states apply them to sales taxes or use taxes that are charged when the property is transferred. In some states, such as Florida, Texas and Massachusetts, sales of recreational vehicles are subject to special taxes at a different sales tax than the regular state sales taxes. These properties are sometimes also subject to capital gains tax, if sold at a profit.