Tax free profits between years 2-5

1 Reply

I've been told by my real estate agent (and confirmed through my own due diligence) that if you sell your house after 2 years, and before 5 years, you're not required to pay capital gains tax. I've owned my house for 1.5 years, and now the military has moved me to a new state. Can I still take advantage of this tax break after 2 years just by owning, or do I have to physically live in the house for 2 years? Thanks!

Short answer: Yes.

Long answer: You don't even need to hang onto it for the full 2 years. If you are moved for your job, then you can still take the section 121 exclusion, but it is pro-rated. 

Even longer additional answer: There is no 5 year limitation. I think you are referring to a situation in which you live in the house as your primary residence for 2 years and then convert it to a rental. You can still get the section 121 exclusion on capital gains if you sell it within 3 years. (Because the rule is that you have to have lived in it for 2 of the 5 years immediately prior to the sale.) However, this is the military forum so I will add this: If you were moved out of the area on military orders you get a 10-year extension on the 2-in-5 rule. Meaning you could rent the house for 13 years and still get the section 121 exclusion on capital gains tax when you sell.

If you want an even longer additional answer for stuff you may want to know: Google "depreciation recapture on rental property".

Best of Luck with Your Real Estate Investments!  

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