When service families make a home purchase, they often do so with a potentially limited understanding of the tax implications. During the time of occupancy, tax returns become more complex as home depreciation, interest paid and other expenses may be itemized and deducted.
Many military families decide to turn a primary residence into an investment rental property when it's time to PCS to their next assignment. This long-range investment could yield profitable outcomes during the tenure of owning the property through monthly rent payments and mounting home equity. But what happens when it's time to sell the home? Could you end up owing taxes on your profits?
Capital gains is a commonly discussed topic among military home-buying and landlord websites. While this is not professional tax advice offered here, it pays to speak with a professional to get your questions answered accurately.
So What Is Capital Gains Tax?
Simply put, capital gains tax is a government fee on the profit made from selling certain types of assets. These include stock investments or real-estate property. A capital gain is calculated as the total sale price minus the original cost of an asset.
Are There Exemptions to Paying Capital Gains?
According to Military One Source, there are essentially two criteria that could help military families be exempt from capital gains from taxation. The first one is universal to anyone who pays taxes. Capital gains exclusions allow taxpayers to exclude a certain amount of profit from their taxable income, as long as they have physically lived in the house as their primary residence for two out of the last five years. The amount that can be excluded is $250,000 for a single taxpayer and $500,000 for a married couple filing jointly. You won't be taxed on the profit or gains if your total profit is less than these amounts and you meet the residency rule.
Are There Any Additional Benefits for Service Members?
Here's where your military service can benefit you even more: the second criterion is the military extension of the capital gains exclusion. The exclusion allows active-duty military members who are away from their property due to permanent change of station (PCS) orders to extend the five-year period up to an additional 10 years. This means that eligible military members can exclude their capital gains as long as they occupied the primary residence for two of the previous 15 years.
So What's the Bottom Line?
As long as you have lived in the property in question as a primary, principal residence for at least two of the past 15 years, you should be exempt from owing any capital gains taxes when you sell the property. Of course, there are other details and nuances that can best be understood by visiting IRS.gov or by speaking with a trained tax professional.
When it comes to making housing decisions as a military family, there are immediate concerns, such as what size or condition of the home to buy, what the schools are like in a particular zip code, and what the mortgage payment will be, depending on the type of loan or current interest rate. Keep in mind long-range issues, like whether you will eventually sell the home when you PCS or turn it into an investment property. Tax implications should be a major consideration as well.