Capital Gains, Veterans on Sold Rental House

[hokie4life18]

My husband and I sold our rental house in Texas that we purchase back in 2007 while he was active duty, we put the house up for rent in 2010 due to moving to Germany for our next duty station, then he got order and we moved to Virginia where my husband eventually got out of the military in 2016. We end up staying here in Virginia since he got a job and we couldn't make our way back to Texas, we decided to sell the house this year 2021 since the market was really good. 

My question is I'm assuming we have to pay capital gains and can't be exempt since he is no longer active duty? Other people we have talked to think we would be able to exempt. Anyone dealt with this before and can provide any help

[DaveF1006]

It depends.  During the period of time when you didn't live in the house, was it vacant during this time or was it a rental? I ask this because there is a different reporting requirement between rental property and personal residences.  If you can answer this immediately, I promise to have an answer.

[hokie4life18]

It was a rental starting in 2010 till Sept 2021

[Mike9241]

none of the gain is excludable since it was not your principal residence for 2 out of 5 years before the sale. in addition, you must recapture as 1250 gain (depreciation recapture) on the lesser of the gain or the depreciation allowed or allowable.

even as a vet the gain would still be taxable

the period you were in the military for up to 10 years can be excluded for the use test.

so your use period is from the date bought it in 2007 to the date you went in the military, since you were in for less than 10 years, your use period resumes when you left the military til the date you sold it.

that is more than 5 years.

counting back from the date of sale and ignoring the period you were in the military it was not your principal residence for 2 out 5 years before sale. 

so in either case the home sale exclusion would not apply.

[DaveF1006]

It depends because this is a rental as well as it was once a residence. To try to properly answer this question, I looked at this Turbo Tax link. With this link in mind, here is my analysis.

1. If this was strictly a personal residence, the military parameters are that you would have had to live in home for 2 out of the previous 10 years to qualify for the exclusion. This means that you would had to live in the home two years in the period of 2011-2021. You didn't meet this requirement.
2. You still need to report this as a sale of a rental. There is still normal depreciation recapture that has to be claimed on your return regardless on whether or not you were in the military.

To report the rental sale go to;

1. With your return open in TurboTax,
2. Go to federal>wages and income>Rentals, Royalties, and Farm>ental Properties and Royalties (Sch E)
3. Answer Yes to the question Did you have any rental or royalty income and expenses?
4. When you get to Is this a rental property or royalty? select Rental property and fill out the description, address, and owner.
5. When you hit Do any of these situations apply? you'll definitely want to check the Sold box along with any other boxes that may apply.
6. Continue following the onscreen prompts to enter info about your rental property. Eventually you'll get to the Rental Summary screen. Here, you can report the sale in the Sale of Property/Depreciation section, along with any other pertinent info (income, expenses, etc.)

 

[Carl]

Actually, it's not a maximum 10 year extension for military. It's a "suspension" of the day count, and the full 10 years should not be assumed.

Basically, you must have lived in the home as your primary residence for 2 of the last 5 years you owned it. That's 730 days of the last 1826 days you owned it, with the "lookback" day count starting on the closing date of the sale.

For military, the day count is suspended starting from the date you vacate the house . Then the day count resumes:

 - The date you return to the local area where the house is, on official military orders, or;

 - The date of separation/retirement as stated on the separation/retirement orders.

Note that the above end dates could be less than 10 years, but it can't be more.

Per publication 523 page 5 at https://www.irs.gov/pub/irs-pdf/p523.pdf#en_US_2021_publink100073089

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The period of suspension can’t 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 can’t 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.

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So in this case, the period of suspension started in 2010 on whatever date the house was vacated. Then ended on the official separation date in 2016. The "day count" resumed the day after official separation/retirement. Most likely (depending on the date) this does not qualify for even a partial exclusion of the gain. Espeically if the closing date of the sale was more than 1826 days after separation.