Over the years, families learn that once they start feeling settled in their current hometown, they can soon expect military orders to land in their 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 the next move, you're forced to ask yourself, “Should I sell my home or list it as a rental?”
It’s a complicated topic to consider because the best answer isn’t black-and-white; it’s a shade of gray. It requires consideration of factors such as plans for a forever home, the current real estate market, and which property improvements are needed to sell or rent successfully.
Oh, and taxes. While they aren’t usually the first thing you want to address, they’re essential to the decision-making process. There are details to consider, like military home sale tax benefits, whether you sell or rent your home.
A helpful certified public accountant from MacRae Associates shared an overview of tax-related information.
After they sell that capital asset, the difference between what it costs (the adjusted basis) and the amount realized from the sale is a capital gain or a loss. A capital gain occurs when an asset is sold for more than its adjusted basis, and a capital loss occurs when it is sold for less. Note that you can never take a capital loss on personal property. It's important to talk to a tax professional regarding your tax plan.
In most circumstances, home sellers will pay taxes after they’ve sold their home. However, there are some ways for military members to mitigate or delay paying taxes.
If you want to know more about home selling and taxes (especially how much tax do you pay when selling a house), these detailed articles will help you learn more about your situation.
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).
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.
Thankfully, there is an exception to that rule. When a military member serves on qualified official extended duty orders, they may suspend the five-year ownership timeframe and still obtain a capital gain tax exclusion. Think of it as one of the military home sale tax benefits service members are eligible for. This suspension of timing lasts 10 years, provided they meet the two-year qualification.
This capital gain tax exclusion is valid as long as the military member meets the following criteria:
Each new place a family gets stationed is often a long distance from the previous assignment, so for peace of mind, you might prefer to hire a professional to manage your rental property.
Property managers can:
If you're a military homeowner and new to renting out your home, see our free guide below, packed with info and created just for the military lifestyle.
Consider tracking your rental property expenses for taxes as a crucial task, akin to completing important homework. By diligently keeping records of receipts and statements, you'll have the opportunity to save money on your taxes and position yourself for success.
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 to the IRS documents because there are specific qualifications for deductions.
They also recommend that those who own a rental property 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's 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.
Tax information surrounding home selling and renting is a lot to digest. It's normal to have lengthy discussions about selling or renting your home each time PCS orders arrive. 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 and supply ample tax tips for military home sellers.
Whether you receive short-notice orders or a regular military assignment, turn to MilitaryByOwner to help ease the buying, selling, and renting transition and utilize our free guidesl ike the one below.