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Anonymous
Not applicable

Active military w/investment property. 25% tax bracket. $100K gain on sale. Lived in for 1 yr out of previous 8. Does a suspension apply? Does a partial exclusion apply?

Exploring the sale of my investment property. I lived in it from May 2011 - July 2012, after which time it was solely a rental property. I have been an active duty military member since 2002, before I purchased the home. Married filing jointly, however, at the time, although we both lived in the home, we were not married. We are in the 25% tax bracket currently. I'm trying to anticipate if a military suspension of the 2/5-year use test applies (out to 10 years is my understanding). Also trying to figure out if a partial exclusion applies (based on the use test). Our anticipated gain is $100K.

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Accepted Solutions
JulieH1
New Member

Active military w/investment property. 25% tax bracket. $100K gain on sale. Lived in for 1 yr out of previous 8. Does a suspension apply? Does a partial exclusion apply?

The IRS does allow you extra time to gain the exclusion when you have to serve overseas or PCS and cannot sell the home.  You do not "get credit" for your time away, but your time is extended.

Specifically, the rules allow you to “suspend” the years while you are away from your primary residence while on Qualified Official Extended Duty. Qualified Extended Duty includes a PCS move of at least 50 miles from your current primary residence or if you are assigned to Government Quarters under Government Orders (i.e. you are required to move into base housing due based on your job or some other military requirement).

The suspension can’t be for more than 10 years and you can only do it for one home at a time…you can’t have two primary residences. To simplify all the above, if you lived in your home for at least 2 of the last 10 years and you left your home because of military orders (PCS or into Government Housing) you qualify for the exemption of the Capital Gains on the sale of your primary residence.

Because you did not live in the home when you returned and sold it, you never lived in it the necessary 24 months which is why the gain cannot be excluded.  

See IRS Publication 523, page 3 and 4 for examples

In order to use the partial exclusion test, the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event.  since you did not sell the home when you PCS'ed and made it a rental you cannot use this.  I tried it for a military client as there was no case law and the IRS ruled against us.  You have to" sell it immediately  due to the move, health issue or unforeseeable event."

https://www.irs.gov/pub/irs-pdf/p523.pdf 

Make sure you have your basis adjusted for improvements and repairs over the years to possibly lessen the gain.

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6 Replies
JulieH1
New Member

Active military w/investment property. 25% tax bracket. $100K gain on sale. Lived in for 1 yr out of previous 8. Does a suspension apply? Does a partial exclusion apply?

The IRS does allow you extra time to gain the exclusion when you have to serve overseas or PCS and cannot sell the home.  You do not "get credit" for your time away, but your time is extended.

Specifically, the rules allow you to “suspend” the years while you are away from your primary residence while on Qualified Official Extended Duty. Qualified Extended Duty includes a PCS move of at least 50 miles from your current primary residence or if you are assigned to Government Quarters under Government Orders (i.e. you are required to move into base housing due based on your job or some other military requirement).

The suspension can’t be for more than 10 years and you can only do it for one home at a time…you can’t have two primary residences. To simplify all the above, if you lived in your home for at least 2 of the last 10 years and you left your home because of military orders (PCS or into Government Housing) you qualify for the exemption of the Capital Gains on the sale of your primary residence.

Because you did not live in the home when you returned and sold it, you never lived in it the necessary 24 months which is why the gain cannot be excluded.  

See IRS Publication 523, page 3 and 4 for examples

In order to use the partial exclusion test, the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event.  since you did not sell the home when you PCS'ed and made it a rental you cannot use this.  I tried it for a military client as there was no case law and the IRS ruled against us.  You have to" sell it immediately  due to the move, health issue or unforeseeable event."

https://www.irs.gov/pub/irs-pdf/p523.pdf 

Make sure you have your basis adjusted for improvements and repairs over the years to possibly lessen the gain.

Anonymous
Not applicable

Active military w/investment property. 25% tax bracket. $100K gain on sale. Lived in for 1 yr out of previous 8. Does a suspension apply? Does a partial exclusion apply?

Thank you. That was very helpful.
JulieH1
New Member

Active military w/investment property. 25% tax bracket. $100K gain on sale. Lived in for 1 yr out of previous 8. Does a suspension apply? Does a partial exclusion apply?

You are welcome

Active military w/investment property. 25% tax bracket. $100K gain on sale. Lived in for 1 yr out of previous 8. Does a suspension apply? Does a partial exclusion apply?

In TurboTax, how do you apply this military-specific exemption/suspension, if you meet the requirements? Do you just not file the property's sale, or do you only file the property under a certain section as opposed to another, or is there checkbox or something somewhere?

mbison
New Member

Active military w/investment property. 25% tax bracket. $100K gain on sale. Lived in for 1 yr out of previous 8. Does a suspension apply? Does a partial exclusion apply?

Hi, I had a similar question, but my circumstances are slightly different. I bought a house and lived in it for a year with my family, then I got stationed in overseas for 4 years. During these 4 years, the house was rented out. The 4 years, was kind of rough on my family, so I decided to get out of the military. I came back to San Diego, I tried to find a job in San Diego so we could live in the house, but due to COVID it was kind of difficult. I ended up finding a job in Los Angeles, and my tenant moved out for COVID reasons, and now I need to sell my house. I would have loved to live in the house, but I couldn't because I couldn't find a job in San Diego. Is it possible to get partial exclusion? Thanks.

Hal_Al
Level 15

Active military w/investment property. 25% tax bracket. $100K gain on sale. Lived in for 1 yr out of previous 8. Does a suspension apply? Does a partial exclusion apply?

@mbison  Yes, you qualify for the home sale exclusion. 

Active-duty military, foreign service, and intelligence community members may be able to use more than five years to live in the home for 24 months. They are allowed to “suspend” the 5 year period. 

 

The fact that you only lived in it 12 months (you actually have to count days) means your maximum exclusion is reduce by 50%.  If you are Married Filing Jointly (MFJ) this means you can exclude up to $250,000.  Note that the military rule is not a "partial exclusion", it's a reduction of the maximum exclusion. 

 

You will have to pay tax on the depreciation recapture portion  of the capital gain. 

 

TurboTax (TT) can handle all this. Follow the interview carefully.  I think it goes smoother if you enter as a home sale, rather than the sale of a rental (TT can handle it either way).

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