Capital Gains Information for Service Member Home Sellers

Posted by Lauren Schneider on Monday, January 20th, 2020 at 7:24am.

Everything You Need to Know About Capital Gains for MilitaryMany Security-Widefield homeowners have to pay capital gains tax on their home when they sell their property. Capital gains taxes can reduce a homeowner's profits. It's a little-known fact that many service members don't have to pay capital gains taxes. If you're a service member, you should be aware of this benefit, especially if you're planning to sell your home soon. Here's what you need to know.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

What Are Capital Gains Taxes?

Capital gains taxes are taxes applied to the sale of an asset. Generally speaking, the amount that is taxed is usually the difference between the purchase price and sale price of the asset.

For the sale of a primary residence, homeowners are given a break on the capital gains taxes. Single people do not have to pay capital gains taxes on the first $250,000 they make selling their primary residence. Married couples don't have to pay capital gains taxes on the first $500,000 they make selling their primary residence. This break on the capital gains taxes is called an exclusion.

What is the Ownership and Use Test?

These exclusions only apply if the homeowner used the home as a primary residence for two of the last five years. This can be confusing for many people, but it's important to understand what this means.

Imagine that Joe and Mary, a married couple, move into a house in January 2015, and then move out in January 2018. They rent the house for one year, and then sell the house in January 2019 for $360,000. They lived in the house for a total of three years altogether, and thus do not have to pay taxes on their capital gain.

However, imagine that Joe and Mary move into a house in January 2015 and then move out in January 2016, and rent the property until January 2019, when they sell it for $360,000. They lived in the house for only one year and will have to pay capital gains taxes on the profit of their home.

Military Family Exclusion Timeline

For military families, however, this exclusion is applied a little differently. Whereas standard homeowners can only exclude the first $250,000 or $500,000 if they used the home as a primary residence during two of the last five years, military families can exclude those amounts if they used the home as a primary residence during two of the last fifteen years.

For example, imagine that Mary and Joe buy their house in January 2009, and live in it until January 2011. They move away because one of them becomes permanently stationed more than 50 miles away from their home. They rent the home to a tenant until January 2019, when they decide to sell it for $360,000. Because they owned the home for two out of the last 10 years, they can sell without paying capital gains taxes.

What Else You Should Know About Capital Gains Taxes

Capital gains taxes are applied to any home that is considered a second home, unless the home was lived in as a primary residence for at least two out of the last fifteen years. Capital gains taxes are also applied to rental properties unless those rental properties spent at least a portion of their time being used as a primary home.

Not all service members may be eligible for these breaks on capital gains taxes. For example, service members who left their home after switching to a base that was closer than 50 miles away from their home may not be able to take advantage of these special breaks.

The easiest way to find out whether your home sale qualifies for these special breaks is to talk to your accountant. A certified accountant will understand the rules that dictate which service members get a break and which ones do not. In addition, working with an accountant will help ensure the capital gains taxes are paid properly.

Contact Your Real Estate Professional

If you're a service member who is thinking about buying or selling a home sometime soon, contact a real estate professional who has experience working with members of the military. Working with an experienced real estate agent can help ensure all the factors military personnel should consider are discussed when trying to purchase a home. In addition, your real estate professional can help you negotiate a good deal for a home.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

Lauren Schneider

Lauren Schneider, Real Estate Agent and Military Relocation Professional (MRP)

Lauren Schneider has lived in Colorado Springs for nearly 20 years and knows that the military is what keeps this town ticking, which is one of the reasons she's chosen to pursue her dream of helping military families with all of their homebuying needs. Learn more about Lauren or start your home search now

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