special tax rules for military selling primary residence?

[WM]

Hi!

Does anyone out there have experience or know about special rules for military personnel when selling a home?

The IRS publication I found on selling a home (#523) says:

Members of the uniformed services or Foreign Service. You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on “qualified official extended duty” as a member of the uniformed services or Foreign Service of the United States. This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale.

If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that does not include the gain.

Example.

David bought and moved into a home in 1998. He lived in it as his main home for 2½ years. For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. He then sold the home at a gain in 2006. To meet the use test, David chooses to suspend the 5-year test period for the 6 years he was on qualified official extended duty. This means he can disregard those 6 years. Therefore, David's 5-year test period consists of the 5 years before he went on qualified official extended duty. He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period.

Period of suspension. The period of suspension cannot last more than 10 years. Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. You cannot suspend the 5-year period for more than one property at a time. You can revoke your choice to suspend the 5-year period at any time.
...
Qualified official extended duty. You are on qualified official extended duty if you serve on extended duty either:

*At a duty station at least 50 miles from your main home, or
*While you live in Government quarters under Government orders.

You are on extended duty when you are called or ordered to active duty for a period of more than 90 days or for an indefinite period.


So, one question is, what constitutes your "main home?"

And does qualified offical extended duty include a permanent change of station?

Anyone know about this?

 

[Nords]

I was watching this as we retired but we never got into a home-selling situation. I'm glad they fixed it for short-tour homeowners.

So, one question is, what constitutes your "main home?"

It's the off-base house that you considered your primary residence until the military issued you a set of orders and made you move. It's where you have a homeowner's exemption on your property taxes. If you own more than one property then I'd work through them one at a time as "main homes" until each had achieved two out of the last five years.

Does that answer your question or am I reading it wrong?

And does qualified offical extended duty include a permanent change of station?

Yup, as long as it moves you 50 miles. Anything less than 90 days would be some sort of temporary duty anyway, not PCS. It could also affect you if you were required to move back on base-- usually due to rank or security issues or job requirements. But having to change time zones is far more frequent than being told to move back on base...

We can make this far more complicated if you're a mobilized Reservist/NG, but I'm going to assume you're discussing active-duty home sellers. Let me know if I'm not correct.

 

[WM]

This is great info, thanks Nords.

Yes, DH is active duty and plans to stay for the 20 years.

We lived in our San Diego house for 5 of the last 5 years, and now we own a home in CO and we're renting out the CA house. So it's really true that we could hang onto the CA house for another 9 years till he retires, and then still get the capital gains exclusion if we sold? I thought there was going to be a catch, as that seemed to be too good a deal.

Basically, as long as you're moving around on military orders but otherwise meet the use test, you can use this rule?

 

[Nords]

Basically, as long as you're moving around on military orders but otherwise meet the use test, you can use this rule?

Yep. The phrase you're looking for is "All this and a paycheck too!"

Your base legal office probably has some sort of summary sheet or pamphlet summarizing the legislation. File it away with a copy of your tax return-- it'll be an invaluable reference for the day four years after you sell the place when you start getting "WTF?!?" letters from the IRS and CA. CA will be especially nasty about the cap-gains tax questions.

I'm going to back away here and ask Martha & Justin to handle the issue of paying taxes on the depreciation recapture when you sell the rental property.

Oh, by the way, your assignment officer called and wants to know... eh, never mind, I couldn't laugh at those jokes either.

 

[d]

okay, i realize that this doesn't really fit the topic, but how about some special tax rules for those who don't get any special tax rules!

 

[Nords]

okay, i realize that this doesn't really fit the topic, but how about some special tax rules for those who don't get any special tax rules!

A military ID card will make you eligible for all sorts of special tax rules.

Of course there's a price to be paid.

 

[d]

A military ID card will make you eligible for all sorts of special tax rules

... but that still would'nt be providing special tax rules to those who don't get special tax rules

 

[WM]

Your base legal office probably has some sort of summary sheet or pamphlet summarizing the legislation. File it away with a copy of your tax return-- it'll be an invaluable reference for the day four years after you sell the place when you start getting "WTF?!?" letters from the IRS and CA. CA will be especially nasty about the cap-gains tax questions.

Great idea, thanks for the suggestion.

I'm going to back away here and ask Martha & Justin to handle the issue of paying taxes on the depreciation recapture when you sell the rental property.

Well, I didn't see anything about that anywhere, so I'm assuming we'll pay those taxes as normal, since we are currently depreciating it and taking the deduction.

okay, i realize that this doesn't really fit the topic, but how about some special tax rules for those who don't get any special tax rules!

My sister says the same thing, taxes and otherwise We definitely have gotten a lot of benefits due to DH's military status, and things have gone well for us with his career generally so far, which we are very grateful for. To some extent, I think we've just been lucky, since most people that DH came in with years ago have now left the service due to the benefits not outweighing the costs.

It would be kind of fun, a tax credit for anyone who didn't qualify for any of the other tax credits

 

[MrMcGraw]

OK, I've got a question along this same line.

I've been in the military for almost 12 years and will be separating soon. Yeah, I know, only 8 more years to retirement, but I have my reasons.

I inherited my dad's farm about 10 years ago. I grew up on the farm, but I haven't lived on it since I inherited it, as I've been in the military the entire time that I've owned it.

I've been leasing it to another farmer since I inherited it.

Would my military service provide me a way to claim the primary residence exemption?

Any help would be appreciated.