Capital gains on a Nantucket second home: how the sale is taxed, and why your records matter
I'm a real estate broker, not a tax adviser, and this isn't tax advice. These are the mechanics as the IRS and the Massachusetts Department of Revenue publish them, with the year attached to every number. Your CPA applies them to you.
Why island gains run large
Many Nantucket houses have been in the same hands for decades. Of the 778 single-family houses that sold through LINK over the last three years, 771 closed at $1 million or more.
The tax is figured on the gain, not on the cash you walk away with, so paying off a mortgage at closing doesn't reduce it. The gain is what you receive for the house, less the costs of selling it, less your adjusted basis: what you paid, plus what you've put in, minus any depreciation.
Why the $250,000 and $500,000 exclusion rarely covers a second home
The rule that lets a seller exclude up to $250,000 of gain, or $500,000 on a joint return, applies only to your main home. The IRS says a person has one main home at a time, and when you live in more than one it looks first at where you spend the most time, then at the address on your tax returns, voter registration and driver's license. You also need to have owned it and lived in it as your main home for two of the five years before the sale.
A summer house doesn't meet that test. Some owners move to the island full time before they sell, which can bring part of the exclusion into play, but only part. Years after 2008 when the house wasn't your main home count as nonqualified use, and the share of the gain that belongs to those years can't be excluded. The longer the house was a second home, the larger the share that stays taxable. A house that was your main home first and a second home later is treated differently, so give your CPA the dates.
The federal tax: long-term rates and the 3.8% investment tax
A house held more than a year produces a long-term gain. The federal rates are 0%, 15% and 20%, depending on your taxable income, and the gain itself counts toward that income. For tax year 2025, the 20% rate began above $600,050 of taxable income on a joint return and $533,400 for a single filer. Those thresholds move every year.
On top of that sits the net investment income tax: 3.8% on the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $250,000 on a joint return or $200,000 for a single filer. Gain from selling real estate counts. Gain covered by the main-home exclusion doesn't.
Massachusetts: 5% on the gain, and a 4% surtax above the threshold
Massachusetts taxes long-term capital gains at 5% and short-term gains at 8.5%.
Then there is the surtax, in effect since tax year 2023 and often called the millionaires tax. It adds 4% on taxable income above a threshold that rises with inflation: $1,107,750 for tax year 2026, up from $1,083,150 for 2025. Long-term gains are part of that income, and the Department of Revenue says there is no surtax exclusion for a home-sale gain that is otherwise taxable.
A household nowhere near the threshold in an ordinary year can cross it in the year the house sells, because the whole gain lands on one return. Only the income above the threshold pays the extra 4%. The surtax counts in estimated tax payments, so raise it with your CPA in the year of the sale.
If you live out of state, Massachusetts still taxes the gain
Gain from real estate in Massachusetts is Massachusetts income wherever the owner lives. The state's regulation uses the example of a Vermont resident who sells property here at a profit and owes Massachusetts tax on the net gain. The sale goes on a nonresident return, and the surtax applies the same way.
Since November 2025 the state also collects a prepayment at the closing table when a nonresident sells for $1 million or more. It's a credit against this tax, not a second one, and the Massachusetts withholding at closing has its own guide. Whether your home state taxes the same gain, and credits what you paid Massachusetts, is your CPA's question.
Basis: the number that decides the gain
Every dollar of basis you can document is a dollar that isn't taxed. Basis starts with what you paid, and IRS Publication 551 adds the settlement costs of buying: legal fees, recording fees, surveys, owner's title insurance and transfer taxes. On Nantucket the largest of those is usually the 2% Land Bank fee the buyer pays at closing. Find the settlement statement from your purchase, and ask your CPA to confirm how each line is treated.
Then come improvements, which the IRS defines as work that adds value, extends the life of the house or adapts it to a new use:
- Additions and structures: a bedroom, a bath, a deck, a porch, a garage
- Systems and grounds: a septic system, heating and central air, a new roof, landscaping
- Kitchens, floors and built-ins that are still in the house when you sell
Repairs and upkeep don't count: painting, fixing leaks, replacing broken hardware. Repair work done as part of a larger renovation does. An improvement that's no longer there doesn't, so if the kitchen has been redone twice, only the current one is in your basis.
The costs of selling come off the other side: the commission, legal fees, and the transfer taxes a seller pays, which in Massachusetts means the deed excise.
If the house was rented, inherited or given to you
Rented. Depreciation you deducted on a rental, or could have deducted, reduces your basis and increases the gain. The part of the gain that comes from depreciation is taxed federally at up to 25%. The guide to selling a house that rents covers the income file and the 1031 exchange, which is available only for investment property.
Inherited. The basis of an inherited house is generally its fair market value on the date of death, not what the family paid. When heirs sell soon after, the gain is often small. The guide for heirs covers the valuation.
Given to you. When parents give a house to their children during their lives, the children generally take over the parents' basis, decades-old purchase price and all. Families weighing how to pass the house down should hear that from a CPA before any deed is signed.
If the buyer will pay you over more than one tax year, the installment rules generally spread the gain across those years, and Massachusetts counts it toward the surtax as it's reported.
The file to start now
Build the basis file years before a sale, while the contractors are still in business and the invoices are still in a drawer.
- The settlement statement from your purchase
- Contracts, invoices and proof of payment for every renovation, addition and system replacement
- Building permits and Historic District Commission approvals, which date the work
- Septic, sewer and water connection records
- Depreciation schedules from every year the house was rented
- A date-of-death appraisal if any share was inherited, or the giver's records if it was a gift