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Home sale rules for the military

Dear Tax Talk,

Please answer this question! There are many military families in the same situation as we are in. My husband is a Marine on active duty. In May 2001 we purchased a home in San Diego. We had every intention of living there for several years. In July 2002 my husband received overseas orders. We have been living overseas since July 2002 and have rented our property out since then.

We don't believe we will be stationed there again. We would like to consider selling it, but I believe there is an issue as to whether we can meet the "use" portion of the "use and ownership" test. We lived in the property for only 15 months. I know that Congress extended the 2/5 year rule to 2/10 years for members of the military, but this doesn't help.

I have read Publication 523 and see that there are safe harbor provisions that would allow you to avoid tax on the gain, if you moved due to employment change greater than 50 miles away. This would apply to us. However, and here is the meat of the question, all the examples in Publication 523 have the person living in the home when the employment changes, thus requiring the sale. We are not living in the home. So do you believe we could still take advantage of this safe harbor?

Also in Publication 523 it states that you can avoid gain on a rental property, but you must meet use and ownership tests. Does that mean you can meet it with exceptions or that the safe harbor provisions would not apply? Please help! Thanks so much! -- Vera of Okinawa, Japan



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Dear Vera,
Although the home-sale rules are somewhat more relaxed for military moves, they don't really help you in this situation because they stop short of giving you the additional period of usage you need. What does help you is that you had a job-related move, and the safe harbor rules that relate to job moves would still apply. Most folks that make a job-related move might want to try out their new location before selling their old home. Therefore, contrary to how you read the examples, you can still get the partial exclusion even though you don't live in the home at the time you sell it.

In your situation, you need to apply the rules that provide for a reduced exclusion on a job-related move. The general rule is that if you lived in and owned the home for two years, within the last five years prior to the sale, you can claim an exclusion of $250,000 in gain, or $500,000 for a married couple filing a joint return. Under the reduced-exclusion rules that apply to a job-related move, the exclusion is reduced for the actual period of use within five years of the sale, divided by the required 24 months.

In your case, since you used the property for 15 months out of the required 24, you can claim 15/24ths of the $500,000 or $312,500 as your maximum exclusion. Under the special rules for military, you can suspend the five years for up to 10 years after you move out and still claim the full 15 months of use and exclusion.

Bankrate.com's corrections policy
-- Posted: Sept. 8, 2005
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