Post from MilitaryByOwner
Immediately after you became a homeowner, you started caring for your investment. You saved where you could and tweaked things when needed. And when you received orders to move to your next assignment, perhaps you saw the opportunity to make a little money and rented it to other military families moving to the area, knowing that when the market was right, you could hopefully sell the home and see a return on your initial investment.
But even if it all works out that smoothly, there are some facts you should know about taxes when it comes to selling your home as a military member.
Let’s start with the big question: Is the money you profit from your home sale taxable? The short answer is yes. But, there’s a rule that benefits most— capital gain tax exclusion.
Capital Gain Tax Exclusion
This exclusion says that if you owned and lived in the property for two of the five years before the sale, then $250,000 of the profit is tax-free. And if you’re married and file a joint return, then the tax-free amount doubles to $500,000.
Basically, the IRS allows a couple filing a joint return to make $500,000 in their home sale before demanding a piece of it.
A couple of things to note:
- You’re only allowed to use this exclusion once every two years.
- Both spouses must meet the residency requirement and live in the home for two years.
- Only one spouse has to meet the ownership requirement.
As a military family who receive orders to PCS every two to three years you might be thinking this is a hard requirement to meet (especially if you’re a single service member who spent the majority of last year deployed). But don’t worry just yet.
The IRS offers a little grace with the extended duty exemption.
Extended Duty Exemption
The IRS allows you to extend the five-year period which is used to qualify you for the capital gain tax exclusion.
Learn more: The Effect of Capital Gain Tax Exclusions on Military Home Sellers.
This means that, even if you don’t meet the residency requirement above because you moved last year or served on an overseas deployment for eight months, you can still qualify for a capital gain tax exclusion.
The exemption requirements are as follows:
1) You were called or ordered to active duty for an indefinite period, or for a definite period of more than 90 days.
2) You served at a duty station at least 50 miles from your main home, or you were living in government quarters under government orders.
3) You are one of the following:
- A member of the armed forces (Army, Navy, Air Force, Marine Corps, Coast Guard).
- A member of the commissioned corps of the National Oceanic and Atmospheric Administration (NOAA) or the Public Health Service.
- A Foreign Service chief of mission, ambassador-at-large, or officer.
- A member of the Senior Foreign Service or the Foreign Service personnel.
- An employee, enrolled volunteer, or enrolled volunteer leader of the Peace Corps serving outside the United States.
- An employee of the intelligence community.
But if, even with the help of this exemption, you still don’t qualify for the tax break, you might be able to file for a partial exemption with IRS Form 523.
How do you calculate your profit?
To figure out potential tax exclusions, you need to know your gain.
In the simplest form, your gain is the difference between how much you’re selling a home for and how much you paid for it. But there’s more to consider than that. Pull out your receipts and grab a calculator, because you need to figure out your adjusted basis.
The adjusted basis is what you invested in the home. It’s the amount you paid plus the cost of capital improvements.
A few examples:
- New roof
- A/C
- Pool
- Kitchen remodel
- An add-on
Factoring in your capital improvements will lower your capital gain which may, in turn, help you qualify for the capital gain tax exclusion. But it’s also important to consider other factors like depreciation, energy credits, etc. because these will negatively affect your exclusion.
While online resources can help guide you, a lot of variables affect tax exclusions like divorce, a third homeowner, and more. Since no situation is the same as another, we recommend you consult with a tax professional to ensure that you’re utilizing every exemption available to you.
Check out What You Should Be Doing Now to Sell Your Home Later, then visit MilitaryByOwner for more home selling resources!
