For many property owners in Southeastern North Carolina, the "beach house" isn't just a place for summer memories; it is a significant financial asset. Whether you own a condo in Wrightsville Beach, a fishing cottage in Southport, or a rental on Topsail Island, selling a second home triggers a completely different set of tax rules than selling your primary residence.

In 2026, the difference between a "primary residence" and a "vacation home" can amount to tens of thousands of dollars in taxes. Before you list your property in New Hanover or Brunswick County, here is the playbook for navigating capital gains, the "non-qualified use" trap, and the 1031 exchange option.

The Hard Truth: No $500k Exemption (Usually)

Most sellers know about the Section 121 Exclusion, which allows married couples to sell their primary home tax-free up to $500,000 in profit.

The Trap: This only applies to your primary residence. If you sell a second home that you have never lived in full-time, every dollar of profit is taxable.

The Rates: You will likely pay Federal Long-Term Capital Gains tax (15% or 20%, depending on income), plus the Net Investment Income Tax (NIIT) of 3.8% if you are a high earner.

The NC Sting: Don't forget the state. North Carolina taxes capital gains as ordinary income. In 2026, the state income tax rate is scheduled to drop to 3.99%, but that is still a flat tax on your entire profit.

The "Conversion" Strategy (and its Limits)

A common question we hear is: "Can I just move into my beach house for two years to make it my primary, and then sell it tax-free?" The answer is: Yes, but with an asterisk.

The Old Rule: Years ago, you could convert a rental to a primary, live there for two years, and get the full tax-free exclusion.

The Current Rule (Non-Qualified Use): The IRS now calculates "Non-Qualified Use." If you owned the home for 10 years but only lived in it as a primary residence for the last 2 years, you only get a partial exclusion based on the ratio of "qualified" vs. "non-qualified" time. You cannot erase the years it was a pure investment property.

The 1031 Exchange: The Wealth-Building Escape Hatch

If your vacation home has been used primarily as a rental (specifically, if you rented it out for 14+ days a year and limited personal use to 14 days or 10% of rental days), you may qualify for a 1031 Exchange.

The Move: Instead of paying taxes on the sale, you roll 100% of your profit into a "like-kind" investment property.

The Upgrade: You could sell a high-maintenance oceanfront condo in Carolina Beach and exchange it for a brand-new duplex in Leland or a portfolio of long-term rentals in Hampstead. This allows you to defer the taxes indefinitely while shifting your money into an asset with better cash flow or lower insurance costs.

Don't Forget "Depreciation Recapture"

If you have been depreciating your rental property on your taxes for years (as you should), the IRS will want that money back when you sell. This is taxed at a flat 25% rate (uncaptured section 1250 gain). This often catches sellers by surprise at the closing table.

We Are Your Tax Strategy Partners

Selling a second home is less about "curb appeal" and more about "net proceeds." You need a team that understands the math before the sign goes in the yard.

At Aspyre Realty Group, we work hand-in-hand with your CPA and Qualified Intermediaries to ensure your sale is structured correctly. We help you calculate your potential tax liability before you list, so you can decide if a 1031 Exchange or a simple cash-out is the right move for your portfolio.

If you are ready to unlock the equity in your coastal retreat, let’s run the numbers together.