Military Capital Gains Exemption

San Diego, CA · Member since 2023 · 4 posts · 2 votes

I have a home that I bought while I was active duty. I lived in it for 2 years prior to turning it into a rental property. After I moved out, I separated from the military. I am past the 5 year mark since living in it. Reading up on the 2 out of 5 rule that can be extended up to 10 years for PCS moves, does that also apply to separation? Looking to see if I can just sell and not pay capital gains, or if I'll need to 1031.

Thank you!

Chris

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Jaime Duron
Realtor · Austin, TX · Member since 2019 · 69 posts · 28 votes
2y
Hi @Chris Combado! Thank you for your service as I was also in the military and recently retired. I would talk to a 1031 Intermediary and or a CPA to ask what their recommendations would be on the safe side. There is not must clarity, but guidelines to follow. I did a 1031 on the safe side, but found out later that I didn't need to do one, luckily the cost was only 1K. Hopefully, the little info I put out helped.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
2y
@Chris Combado, Publication 523 from the IRS lays out the requirements to extend that window for selling your primary residence. Some our fellow CPAs out there will have a more definitive answer for you. But I fear you must be on active duty in order to extend.
However, there's another reason entirely that would send me to a 1031 exchange. And that is depreciation recapture. Since you moved out you have either been depreciating that property. Or you could have been depreciating the property. Either way, if you sell without a 1031 you will have to "recapture" that depreciation and probably at 25%.
A 1031 exchange will defer that and also defer the gain from the sale if you find that the extension doesn't apply to you.
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Chris Combado
OP
San Diego, CA · Member since 2023 · 4 posts · 2 votes
2y
@Dave Foster @Jaime Duron,

Thank you for the replies! I've been told both from others I've talked to. So it looks like I'll be reaching out to my CPA on this one. Either way I'm looking to eventually purchase a couple more properties after I do the sale. But not having to 1031 allows me a little more flexibility with the timeline of those purchases. This wouldn't be happening until potentially the end of the year either way but thank you!
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