If you’re thinking it’s time to sell your home, then you, like most home sellers, hope to walk away with a little extra cash in your pocket. But have you stopped to think about the taxes you might owe on the profit from your home sale?
This is one of the most common questions military members ask when they decide to sell before a PCS move. Even though it’s not earned income, the IRS calls the profit made in a home sale capital gains and requires you to let them in on the windfall.
However, as a military home seller, you may qualify for military home sale tax benefits if you meet certain eligibility requirements.
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How Are Capital Gains Calculated?
Capital gains tax is a tax on the profit made from the sale of property or an investment. The capital gains tax exclusion is a tax break on the profit made from the sale of a primary residence. Single homeowners can exclude up to $250,000, while married couples filing jointly can exclude up to $500,000.
Understanding how the capital gains tax exclusion works can make a big difference in how much you owe after closing.
Current Guidance on Capital Gains Tax
Short-term capital gains apply when you sell a property you’ve owned for less than a year. These gains are taxed as ordinary income, meaning the rate is the same as your income tax bracket.
Long-term capital gains apply to property owned for more than one year. These gains are taxed at 0%, 15%, or 20%, depending on your taxable income and filing status. Long-term capital gains rates are typically lower than short-term capital gains tax rates.
Single Filers’ Income
- 0%: $0 to $49,450
- 15%: $49,451 to $545,500
- 20%: Over $545,500
Married Filing Jointly Income
- 0%: $0 to $98,900
- 15%: $98,901 to $613,700
- 20%: Over $613,700
Married Filing Separately Income
- 0%: $0 to $48,350
- 15%: $48,351 up to $300,000
- 20%: Over $300,000
Head of Household
- 0%: $0 to $66,200
- 15%: $66,201 to $579,600
- 20%: Over $579,600
The IRS has further details for those filing in different categories, such as head of household and married filing separately.
Eligibility Requirements for Capital Gains Tax Exclusions
The two eligibility requirements are ownership and residency. To be eligible for tax exclusions, you must have owned the home for at least two out of the five years before the closing date of the home sale. If you’re married and filing jointly, only one spouse must meet the ownership requirement.
To meet the residency requirement, you must have used it as your primary residence for two out of the five years prior to the home sale. Both spouses must meet this requirement when filing jointly.
If you lived away from your home, you'll need to determine whether that time still counts toward your residence requirement. A vacation or other temporary absence counts as time lived in the home, even if you rented it out while you were gone. And if you’re wondering whether deployments and PCS moves affect your eligibility, we’ll cover that in the next section.
It's important to note that the exclusion can only be used once in a two-year period. This is known as the look-back requirement. To meet the look-back requirement and be eligible for capital gains tax exclusions, neither you nor your spouse can have claimed the exclusion on another home sale in the past two years.
For more detailed information about eligibility and exclusion requirements, review IRS Publication 523.
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How Does a PCS Move or Deployment Affect a Capital Gains Tax Exclusion?
Understand how the IRS defines a qualified official extended duty exemption.
The IRS provides a special provision for service members and certain government personnel that allows for a suspension of the five-year test period for ownership and residence while serving on qualified official extended duty. This is one of the most valuable home sale tax benefits available to military homeowners.
In practice, this means that if you don’t meet the usual residency requirement because you PCS’d or were deployed, the IRS may allow you to pause the five-year look-back period, giving you additional time to satisfy the eligibility requirements for capital gains tax exclusion. The suspension doesn't replace the requirement to live in the home for two years—it simply extends the window in which you can meet it.
Requirements for the Extended Duty Exemption
You qualify for the suspension if both of the following are true:
- You were called or ordered to active duty for an indefinite period, or a definite period of more than 90 days.
- You were serving at a duty station at least 50 miles from your main home, or you were living in government quarters under government orders.
OR you are one of the following:
- A member of the armed forces (Army, Navy, Air Force, Space Force, Marine Corps, Coast Guard)
- A member of the commissioned corps of the National Oceanic and Atmospheric Administration (NOAA) or the Public Health Service
- A Foreign Service chief of mission, ambassador-at-large, or officer
- A member of the Senior Foreign Service or other Foreign Service personnel
- An employee, enrolled volunteer, or enrolled volunteer leader of the Peace Corps serving outside the United States
- An employee of the intelligence community
An important limitation is that the period of suspension can’t be longer than 10 years. When combined with the standard five-year test period, this can provide up to 15 years in total to meet the ownership and use requirements for the capital gains tax exclusion.
Note: You can’t suspend the five-year period for more than one property at a time.
If you don’t qualify for a full exclusion even with this suspension, you may still be eligible for a partial exclusion, as outlined in IRS Publication 523.
Tax Implications for Military Homeowners Selling Rental Property
You may be in a position to buy a home with the plan to convert it into a rental after a PCS. Many military homeowners choose this investment strategy to bolster retirement income or generate additional monthly cash flow. But just like the sale of a primary residence, taxes are due when you sell a rental property, even if you originally planned to sell the home as a primary residence.
Below are tax considerations to keep in mind after selling a rental.
Depreciation Recapture
The IRS allows landlords to take a depreciation deduction, reflecting the natural wear and tear on the structure. However, after the sale, the IRS requires the depreciation benefit returned, otherwise known as depreciation "recapture."
If the home sells for more than the depreciated value, you’ll owe taxes on the amount of depreciation previously deducted.
Rental Property Conversion or a 1031 Exchange
If you expect a significant tax bill after selling your rental, consult a tax professional to review your options. They can explain strategies such as reverting the rental property back into your primary residence or selling the rental home and reinvesting the money into a like-kind asset, known as a 1031 Exchange.
Depreciation recapture, a rental conversion, and a 1031 Exchange each has rules of eligibility and requirements, so professional guidance is essential.
Consider the Effects of Tax Exclusions Before Buying a Home
Military home sellers aren't unique in being eligible for tax relief after they sell a home, but understanding available military home-sale tax benefits can help you make more informed decisions long before you say to yourself, "I think I’m going to sell my home." Preparing early can help minimize surprises and clarify whether you’ll owe taxes when the time comes.
Please note: This article is for informational purposes only and does not constitute legal or tax advice. For more detailed guidance on capital gains, depreciation recapture, or questions such as, "Do you pay taxes when you sell a house?" consult a qualified tax professional or review IRS guidance.
