Sale of rental - military

[kamckinley]

I searched the forum, but the last post on this was more than 10 years ago (and very brief), so I'm posting a fresh thread.

Client is a military member; she bought a home in Texas in 2006. She lived in the home until 2010 when she had a permanent change of station to California. She rented the home from 2010-2018, then sold the home in 2018.

At first glance, she doesn't meet the lived in the home the last 2 out of 5 years. However, military members can suspend the 5-year test for up to 10 years if they were on qualified extended duty.

So, if she suspends the 5-year rule for the last 8 years, she qualifies for the exclusion and doesn't have to pay taxes on the gain of $37,850.

Since this was a rental property, she still has to pay taxes on the depreciation recapture of $13,285.

Next wrinkle... she sold another home in 2017 and took the full exclusion.

Using the Reduced Exclusion worksheet in Pub 523, her exclusion limit is $120,890. This is the number of days from her last exclusion to the date of the sale of the current home, or 48% times $250,000.

The gain on the sale of the TX house is $37,850; since her exclusion limit is $120,890, none of the gain is taxable, correct?

So, in conclusion, she needs to pay taxes on the depreciation recapture since the house was rented from 2010-2018, but she does not have to pay taxes on the gain since it is less than the reduced exclusion amount.

Did I do this correctly? Thanks!

[TaxGuyBill]

What is your reasoning for qualifying for the Reduced Exclusion? It isn't automatically just prorated based on two years, there needs to be a qualifying reason. Without digging into the rules, I don't see a qualifying reason in this situation.

[kamckinley]

Wouldn't she qualify for a partial exclusion due to a work related move?

From Pub 523 - Work-Related Move
You meet the requirements for a partial exclusion if any of the following events occurred during your time of ownership and residence in the home.
• You took or were transferred to a new job in a work location at least 50 miles farther from the home than your old work location. For example, your old work location was 15 miles from the home and your new work location is 65 miles from the home.

The reason she moved and sold the house was because she was re-stationed from Texas to California. The sale of the house didn't occur for many years after her move; Pub 523 just says if the event occurred during your time of ownership and residence. Does the fact that she sold the home years later disqualify her for the partial exclusion?

Am I misunderstanding? That's why I'm asking, I want to know if I am not doing this correctly.

Thanks!

[TaxGuyBill]

But your issue is claiming two exclusions in less than 2 years. The work-related move has nothing to do with that (it was 7 years before the first exclusion).


If the 'issue' was that the taxpayer had originally only lived in the first house for 1.5 years, yes, the work-related move would be a qualifier because the move is what caused the taxpayer to not meet the 2-year residence test. But in your case, the move had nothing to do with the taxpayer not meeting the only-claim-one-exclusion-in-two-years test.

[kamckinley]

Thank you for your help, I appreciate it!