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Dear Tax Talk,
We are a military family being relocated. We are 3 months short of the 2-year homeownership requirement for the home sale exclusion. Will we have to pay capital gains taxes even though we are being relocated?
If you meet all of the IRS requirements, you may not have to pay capital gain taxes on the sale of your home, even though you do not meet the 2-year homeownership rule.
Uncle Sam encourages homeownership by offering various tax benefits to homeowners, including the home sale exclusion. And special provisions apply if you are a member of Uniformed Services, Foreign Service or an employee of the intelligence community in the United States and are on “qualified official extended duty.”
Home sale exclusion rules for general population
The general rule for all taxpayers is that your home sale qualifies for exclusion of $250,000 capital gain ($500,000 if married filing jointly) if you meet the following requirements:
- You have owned and used the home as your primary residence during at least 2 of the previous 5 years before the sale date.
- Your home was not acquired as part of an IRS 1031 Like Kind Exchange during the previous 5 years.
- Within 2 years of the date of your home’s sale, you did not claim any exclusion for another home.
However, in your situation you may be able to qualify for the 2-year residence test even if, because of your service, you have not lived in the home for at least 2 years during the 5-year period ending on the date of the sale.
Let’s go over the term “qualified extended duty” as this is relevant to you. You will meet this important requirement if you meet one of these criteria, as noted in IRS Publication 523:
- 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:
- A member of the armed forces, which includes the Army, Navy, Air Force, Marine Corps or Coast Guard.
- A member of the commissioned corps of the National Oceanic and Atmospheric Administration (NOAA) or the Public Health Service.
- A Foreign Service chief of mission, ambassador-at-large or officer.
- A member of the Senior Foreign Service or the Foreign Service personnel.
- An employee or enrolled volunteer of the Peace Corps serving outside of the United States.
- An employee of the intelligence community.
Thank you for your great question and for your service to our country.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.