Tax Talk: Capital Gains Tax Rules for Wisconsin Second Home (2025)

Tax Talk: Capital Gains Tax Rules for Wisconsin Second Home (2025)

Selling a luxury property in Door County often results in a significant profit, but without proper planning, a large portion of that equity can be swallowed by taxes. Second homes are treated differently than primary residences. You don’t automatically get the standard $250,000/$500,000 exclusion. This guide breaks down the current capital gains tax rules for Wisconsin second home sales, including the federal brackets and Wisconsin’s unique state-level deductions.

⚠️ Important Tax & Legal Disclaimer

The information provided in this article is for informational and educational purposes only and does not constitute legal, financial, or tax advice. Real estate tax laws are complex, subject to frequent change, and vary based on your individual financial situation. Per Wisconsin Statute § 452.135, please be advised that as a real estate licensee, I can provide information on market conditions and brokerage services, but I am not authorized to provide legal or tax advice. Always consult with a qualified CPA, tax attorney, or financial advisor before making decisions related to capital gains or property sales.

Federal Capital Gains Rates for 2025

The IRS views your second home (vacation home or rental) as a capital asset. The tax you pay depends on your “holding period” and your total taxable income.

  • Short-Term Gains (Held < 1 Year): Taxed at your ordinary income tax rate (up to 37%). This is a massive hit for “flippers.”
  • Long-Term Gains (Held > 1 Year): Taxed at preferential rates based on your income:
    • 0% Rate: Income up to $48,350 (Single) / $96,700 (Married Joint).
    • 15% Rate: Income up to $533,400 (Single) / $600,050 (Married Joint).
    • 20% Rate: Income exceeding those thresholds.
  • Net Investment Income Tax (NIIT): High earners (over $200k single / $250k joint) may face an additional 3.8% tax on the gain.

The Wisconsin Advantage: The 30% Exclusion

Unlike many states that tax capital gains at the full income tax rate, Wisconsin offers a significant “investor’s discount.”

  • The 30% Deduction: Wisconsin allows you to exclude 30% of your long-term capital gains from your state taxable income.
  • The Math: If you have a $100,000 gain, you only pay Wisconsin state tax on $70,000 of it.
  • Effective Rate: With the top Wisconsin bracket at 7.65%, the 30% exclusion brings your effective state tax rate down to roughly 5.35%.
  • Note for Farmers: If the second property is a farm asset, that state exclusion jumps to 60%.

Strategies to Minimize Your Tax Hit

You are not necessarily stuck with a massive bill. Here are three ways to protect your profit:

1. The “2-out-of-5” Year Rule (Primary Conversion)

If you move into your Door County second home and make it your primary residence for at least two years (730 days) out of the five years leading up to the sale, you can qualify for the Section 121 exclusion:

  • $250,000 exclusion for single filers.
  • $500,000 exclusion for married couples.
  • Note: If you previously used the home as a rental, you may owe “depreciation recapture” taxes.

2. The 1031 Exchange (Investment Properties)

If your second home is strictly an investment/rental property, you can use a 1031 Exchange to defer 100% of your capital gains taxes by “swapping” the property for another investment property of equal or greater value.

Learn more here: [Door County 1031 Exchange Rules for Investment Property].

3. Adjusted Cost Basis (Home Improvements)

Every dollar you spent on capital improvements (new roof, dock installation, kitchen remodel) adds to your “basis,” which reduces your taxable profit.

  • Keep every receipt. Routine maintenance (painting, lawn care) doesn’t count, but a new patio does.

Final Thoughts

Understanding the capital gains tax rules for Wisconsin second home sales is the difference between a successful exit and a costly mistake. Wisconsin’s 30% exclusion is a powerful tool, but federal brackets can still be steep for high-value Shoreline estates.

Request a “Net Proceeds Estimate”

Before you list your home, you need to know exactly what you will walk away with after taxes.

Request our Private Consultation: “Seller’s Net Proceeds & Tax Strategy Review.”

We will:

  • Calculate your estimated capital gains based on your original purchase price and documented improvements.
  • Apply the Wisconsin 30% exclusion to show your state-level liability.
  • Connect you with a specialized CPA who understands Door County’s unique mix of residential and rental tax laws.

Maximize your equity. Contact us today for your net proceeds estimate.

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Investment & STR Eric Hegwer