Many military personnel change their personal residences more frequently than the average civilian. When it comes time to sell the property, one specific question that comes up right away is: does a military real estate sale avoid capital gains tax?
Because military personnel are forced to move so often, this exacerbates the questions and concerns all of us have when it comes time to decide whether to keep or sell a particular property. With the recent run up in real estate prices, the good news is most of these properties have lots of appreciation. The bad news is the government likes to tax that appreciation. This has many in the military wondering that since they work for the government is there any special treatment? In other words, does a military real estate sale avoid capital gains tax?
Fortunately there is some special good news for those in the armed services. Specifically, the news is for military your real estate sale may avoid capital gains tax! Here’s how it works:
As you are probably aware, if you sell your home for more than you originally paid, the resulting profit is known as capital gain. If your capital gain is no more than $250,000 for an individual (or $500,000 for married couples) the IRS says you can avoid paying capital gains tax as long as you have lived in the house for two out of the past five years. And, actually everyone gets this same “exclusion” amount. But, for military homeowners, while the law is essentially the same as it is for civilian homeowners; it does come with one important exception.
In 2003, Congress passed the Military Family Tax Relief Act, which allows both military and foreign-service personnel to suspend the normal residency period for up to ten years as long as they are stationed at least fifty miles from their property. Basically, if you have been away due to military service for no more than ten years, and have used it as a primary residence for at least two years out of the past fifteen, than you will most likely qualify for exempt status as long as your capital gain is below the maximum amount! It is also good news for military personnel who are interested in buying a home and might otherwise have been discouraged by the normal residency requirements.
Note, if you own an investment property (not your primary personal residence) that has the potential to net a gain greater than the maximum amount allowed for exemption, this rule does not apply. The normal deferral techniques, such as the 1031 exchange rules, are applicable.
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