I sold my rental last year. I bought it in 2008, and it was my primary residence until I got orders in 2010. I meet the 2 out of 15 rule. Where do I annotate this?

[bayouboy]

If my math is correct, and my knowledge of the rules are correct, I lived in the house for 2 out of 15 years. I owned the house for 14 years, lived in it for 2 years, and I had to move due to military orders in 2010.  Am I correct in believing that I am free of capital gains tax?  I'm just having a problem of where to annotate this, unless I'm just not clicking on the right box.

[ShirlynW]

Thank you for your service. No. You are not correct. To meet the exclusion criteria:

You may be able to increase your exclusion amount from $250,000 to $500,000. You may take the higher exclusion if you meet all the following conditions.

1. You sell your home within 2 years of the death of your spouse;
2. You haven’t remarried at the time of the sale;
3. Neither you nor your late spouse took the exclusion on another home sold less than 2 years before the date of the current home sale; and
4. You meet the 2-year ownership and residence requirements (including your late spouse's times of ownership and residence, if applicable).

Service, Intelligence, and Peace Corps personnel.

If you or your spouse are a member of the Uniformed Services or the Foreign Service, an employee of the intelligence community of the United States, or an employee, enrolled volunteer or volunteer leader of the Peace Corps, you may choose to suspend the 5-year test period for ownership and residence when you’re on qualified official extended duty. This means you may be able to meet the 2-year residence test even if, because of your service, you didn’t actually live in your home for at least the 2 years during the 5-year period ending on the date of sale.

Qualified extended duty.

You are on qualified extended duty if:

• You are called or ordered to active duty for an indefinite period, or for a definite period of more than 90 days.
• You are serving at a duty station at least 50 miles from your main home, or you are living in government quarters under government orders.
• You are one of the following:
  1. A member of the armed forces (Army, Navy, Air Force, Marine Corps, Coast Guard);
  2. A member of the commissioned corps of the National Oceanic and Atmospheric Administration (NOAA) or the Public Health Service.
  3. A Foreign Service chief of mission, ambassador-at-large, or officer.
  4. A member of the Senior Foreign Service or the Foreign Service personnel.
  5. An employee, enrolled volunteer, or enrolled volunteer leader of the Peace Corps serving outside the United States; or
  6. An employee of the intelligence community, meaning:
     1. The Office of the Director of National Intelligence, the Central Intelligence Agency, the National Security Agency, the Defense Intelligence Agency, the National Geospatial-Intelligence Agency, or the National Reconnaissance Office;
     2. Any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs;
     3. Any of the intelligence elements of the Army, the Navy, the Air Force, the Marine Corps, the Federal Bureau of Investigation, the Department of Treasury, the Department of Energy, and the Coast Guard;
     4. The Bureau of Intelligence and Research of the Department of State; or
     5. Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information.

For more information

[AmeliesUncle]

Have you been on "qualified extended duty" the entire time?  If so, you are right, you qualify for the home exclusion.  When you are selling the "asset" in the rental section, it should also ask you if it was your Principal Residence.  When you get there, just tell the program you lived there for the 2-out-of-5 years.  There is no need to note the "qualified extended duty" exception.

If you were not on "qualified extended duty" the entire time, you don't automatically get 15 years.  It is 5 years PLUS the number of years you were on "qualified extended duty" (up to a maximum of 10 years, for a total of a 15 year period). 

However, you will still owe tax on the gain due to depreciation.  That does not qualify to be excluded.

[bayouboy]

Yes, maybe I should have mentioned that. I retired last year, so I was on active duty the whole time. Does this exempt me from paying the capital gains taxes?

[Carl]

Some clarity is needed here. Then lets actually "do the math" to confirm things one way or the other.

First, understand the rule.

You must have lived in the property for at least 2 years (730 days) of the last 5 years (1826 days) you owned it, as your *primary residence"*.  Now for the military rule, if you read the rule it says nothing about extending anything. What it says is that the day count is "suspended" for the period of time you are on official military/government orders that require you to vacate the home. Then, the day count "resumes" when those orders expire, or new military orders DO NOT require you to be away from the property. It also says that if/when you retire or separate from the military/government agency, the day count resumes on said separation/termination date. But even so, if you don't qualify for the full exemption, you "may" qualify for a partial exemption.

Now to show you an example of how this works, I'm going to use dates in an attempt to "mimic" the vague dates you supplied.

closed on house on Jan 1, 2008 and began moving in that day, and actually stayed in the home that night. That makes Jan 1 2008 day one of residency.

You received orders with a NLT reporting date of Jun 15, 2010. Household goods were packed out on June 1, 2010 and that night was your first night in other temporary accomodations while you waited for your departure date of Jun 5. So May 30 2010 was your last day of residency in the house. That's 882 days. Well in excess of the minimum 730 days required. So far, so good.

Your days of ownership up to your reporting date adds 10 days to that. So on your NLT reporting date of Jun 15, 2010 (assuming you did not report until that date.)  you have 882 days as your primary residence, and 892 of ownership. The day count stops there.

The day count resumes on June 16, 2020 no matter what. That's 10 years from when the day count stopped.

If you closed on June 15, 2022 that's 730 days of ownership from June 16, 2020 when the day count resumed, until Jun3 15, 2022 when you closed on the sale.

Your total days of ownership are 1,620 days. Therefore, with "my" dates, you qualify for the full exclusion.  Now "your" situation is based upon actual dates, which you haven't shared here. So you'll have to actually do the math on your end to see if you qualify or not. If you don't qualify for the full exclusion, you "may" qualify for a partial exclusion.

[bayouboy]

Here’s the dates as best I remember. Bought the house in June 2008, got orders and PCS’d in August 2010. (Roughly 2 years and 2 months as primary residence. ) So I’m good up to that point. Converted it to a rental as soon as I moved out. It was a rental up until the time I sold it. Sold it July 2022. Retired a couple of months later. Does this qualify for any exclusion?

[Carl]

You should be able to confirm the exact date you closed on the purchase of the property, by going to the website for the county tax assessor for whatever county the property is located in. There you should be able to review all the property records to include title transfer dates.

For your last day in the house, if you had kids in school, then school records will show their last day of attendance, if they were pulled out before school ended for the summer. Otherwise, if you’re really lucky and used daycare for the young ones, the provider “might” still have payment records going back that far that would let you know the last day of daycare you paid for.

It’s also possible that the mypay.dfas.mil website will have the information on the plane tickets or bus tickets that will show you the exact departure date. Being that I retired before all this technology kicked in, I would expect that information to be on the dfas website, since even as a retiree I see I can file travel vouchers online now, if I have any military related travel expenses to claim.

I’m assuming a date of the first day of the months you provided, and assuming you started moving in to the house as your primary residence on the day you closed on the purchase and stayed in the house that same night.

You can “and should” confirm my numbers using the day counter at https://www.timeanddate.com/date/duration.html?y1=2020&m1=8&d1=1

Jun 1 2008 to Aug 1 2010 is 792 days. You met the residency requirement on May 30, 2010. But that’s not relevant for now.

The day count stopped on Aug 1 2010. The day count must resume no later then Aug 1, 2020, as that’s exactly 10 years. Ten years is the longest you are allowed to suspend the day count, with no exceptions.

Using Aug 1 2020 as day 793, you reach day 1826 (the 5-year mark) on May 31, 2023.

By my calculations, and assuming you were not able to return to the house before Aug 1, 2020 because of official military/government orders, you qualify for the full exemption provided you close on the sale on or before May 31, 2023 (which is this year, and not the 2022 tax year.)

Please give time for others to see this post, in case I messed up somewhere and give them the chance to point out my boo-boo, if any is found. I don’t claim perfection here.