Military Tax Benefit: Sale of Primary Residence

I know that in today’s real estate market most of us aren’t too concerned about the taxes on the gain of the sale of a Primary Residence.  But, with that said, the IRS does give military members, some special benefits regarding the sale of a home (I’ll use that term from here on instead of Primary Residence).

Under the Tax Code, any individual may exclude $250,000 (for a married couple it is $500,000) of gain made on the sale of a home.  But, to be eligible, you must have lived in the home for 2 years out of the 5 year period ending on the date of sale.

The IRS, however, allows a special exception for military members.  It allows them to suspend the 5-year test period.  In other words, you may be able to meet the 2 year use test even if the 2 years were not in the 5 year period prior to sale.

However, the absence from the home must be because of Qualified Official Extended Duty which the IRS defines as being sent to a duty station at least 50 miles from your main home or because the military member moved into Government quarters under Government Orders.  Reservists called to active duty for a period of more than 90 days or an indefinite period also qualify.

The period of suspension can’t last for more than 10 years though and you can only suspend the 5 year rule for one home at a time.  Perhaps an easy way to think of it is that to qualify for the exemption, the military member must have lived in the home for 2 of the last 10 years.

Finally, if you rent the home you may owe taxes for depreciation recapture.  The reason for this is that you got to take the deduction, so the IRS wants that money back.  Regardless of whether you rented the property or not, the gain will not be taxable if you meet the usage rules.

Right now it may not seem like a great deal, but it could be of value for those military members forced to move because of PCS orders, can’t sell their home but sell it at some point in the future.

About the author

Curt Sheldon, EA, MBA

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  • I was going to flip you some grief over how long your hair has gotten, but reconsidered when my wife and I realized we may need to legitimately contact you for some real estate advice! What are the odds of this happening off a Google search?

    Cave Putorium!!!

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