Home sale gains and the military

Dear Tax Talk,
I am in the U.S. Air Force and I lived in my house for 18 months before I got orders. I have had renters in it for the last three years and I am selling it now. Since I have owned the house for less than five years, will I have to pay capital gains taxes? If so, how much? -- David

Dear David,
When it comes to the military, Congress and the president have gone out of their way to provide additional tax benefits. IRS discusses these benefits in Publication 3. Unfortunately, they didn't specifically think about your situation -- at least not yet. Barring some election-year, politically motivated tax act, you're probably still able to exclude most of the gain on the sale of your home under the general rules that would apply to anyone motivated by a job move.

The basic rule is that you must have lived in your home in two of the last five years to exclude gain. You don't need to have owned the home for five years, as you suggest. If you lived in the home for any period of time within five years of the sale and you sold because of changed circumstances (such as a job-related move), you can get a partial exclusion.

The partial exclusion is fairly generous. The partial exclusion is a fraction, the numerator of which is the number of months that you lived in the home in the last five years divided by 24 months multiplied by the appropriate exclusion. The exclusion is $250,000 for unmarried taxpayers and $500,000 for married couples. In your case, the exclusion would be the 18 months divided by 24 (or 75 percent) of the appropriate exclusion. This means if you are single, you could exclude up to $187,500 in gain, which is probably more than enough to eliminate the gain you'll have on the sale.