Tax Tips for Military Members Selling or Renting a Home
Over the years, our family has learned that once we start feeling settled in our current hometown, we can soon expect military orders to land in our laps, saying it's time to move again. Just call it the military way! So, when the powers-that-be at the personnel center shake their “Magic 8 ball” and direct our next move, we then have to ponder the question,
“Should we sell our home or list it as a rental?”
It’s a complicated topic to consider because usually, the best answer isn’t black or white; it’s usually a shade of gray. We’ll discuss multiple angles, like plans for a forever home, the current real estate market, and what property improvements are needed to sell or rent successfully.
We will also talk about taxes. While taxes aren’t usually the first thing we want to consider, they’re essential to the decision-making process. Whether we sell or rent our home, there are tax details to consider.
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What Military Members Should Know About Taxes When Selling a Home
While considering selling our current home, I contacted a team of tax experts at MacRae Associates. A helpful certified public accountant walked me through an overview of tax-related information.
Here’s what they explained to me:
1) When a person buys a home, they now have a capital asset. After they sell that capital asset, the difference between what it costs (the adjusted basis) and the amount realized from the sale is either a capital gain or a capital loss. A capital gain is selling the asset for more than the adjusted basis, and a capital loss is when it sells for less. Note that you can never take a capital loss on a personal property. It's important to talk to a tax professional regarding your tax plan.
2) When a home seller sits down to do their taxes, they should calculate their capital gain on both a “Sales and other dispositions of capital assets” sheet (Form 8949) and a “Capital gains and losses" sheet (Form 1040, Schedule D).
3) If all goes well, a home seller may make a profit when selling their home. According to IRS regulations, there may be an exclusion of up to $250,000 from income gained from the sale of a home. (Or, a $500,000 exclusion on capital gain if filing joint taxes with a spouse).
To qualify for this wondrous tax-free amount, within five years, a home seller must have either used the home for at least two years or owned the home as their primary residence for at least two years.
4) Since we live in the land of “what if” with this military lifestyle, what if we PCS to a new assignment before meeting that “two years of residence” minimum?
Thankfully, there is an exception to that rule. When a military member is serving on qualified official extended duty orders, they may suspend the five-year ownership timeframe and still obtain the exclusion. This suspension of timing extends 10 years, as long as the two-years' qualification is met.
This exclusion on gain is valid as long as the military member meets the following criteria:
- On qualified official extended duty for more than 90 days (or for an indefinite period)
- At a duty station that is at least 50 miles from the main residence
- Or, residing under government orders in government housing
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What Military Members Should Know About Taxes and Renting a Home
Each new place our family was stationed was a considerable distance from the previous assignment, so for peace of mind, we prefer to hire a property manager to:
- Find a tenant
- Collect rent
- Maintain positive communication with the tenant and with us
- Tend to the needs of the home
- Direct legal action if eviction is necessary
If you're a military homeowner and new to working with a property manager, browse helpful property management resource articles and blog posts on MilitaryByOwner.
Here's a nice surprise—guess what is tax deductible with a rental? Anything related to keeping a residential rental property up and running is considered a tax-deductible expense, such as:
- Cleaning and maintenance
- Property taxes
- Property management fees
- Property insurance
- Travel to check on the property
- HOA fees
- Legal fees
- Insurance claim deductibles
- Utilities that you cover
- Expenses that exceed what is earned in rent
- Even depreciation of the property over the course of its useful life
Consider tracking your expenses for taxes as a crucial task, akin to completing important homework. By diligently keeping records of receipts and statements, you not only have the opportunity to save money on your taxes but also position yourself for success. This proactive organization automatically earns you a place on the Honor Roll of tax-savvy individuals!
Now, you probably know that if you sell your home, you can deduct the mortgage interest paid up to the date of the sale. But, can you deduct that mortgage interest if you choose to rent it out? The good folks at MacRae Associates referred me to the IRS documents because there are specific qualifications for deductions.
- Publication 936 Home Mortgage Interest Deduction
- Publication 527 Residential Rental Property
- Rent Expense in Publication 535 Business Expenses
- Publication 3 Armed Forces Tax Guide
They also recommend that, if you own a rental property, you seek out the services of a tax professional because calculating gain can get complicated.
If you're a member of the uniformed services and receive a housing allowance that isn't taxable, you may deduct the home mortgage interest. If you rent the home as a residential rental property, it is considered an income-generating property and listed as a business. You may deduct the interest portion of the property mortgage payment but not the amount paid toward the principal balance.
This is a lot of tax info to digest! Now you know why we have lengthy discussions about selling or renting our home each time PCS orders arrive. It’s also easy to see how every situation is unique, and it might be challenging to make the right decision without professional help. Tax pros can help you weigh the many facets of selling your current home or renting it out.
Whether you're handed short-notice orders or a regular assignment, turn to MilitaryByOwner to help ease the buying, selling, and renting transition.