sale of rental by military servicemember

[Possi]

My clients are military and own a house here. In the last 5 years, they have lived in their house just 15 months because of military deployments. 

I understand that the capital gain can be excluded on the sale, but for depreciation recapture. (Because of military deployments)

Where does the basis get adjusted to exclude the capital gain over and above depreciation recapture? 

[Hahn1040]

The Sale of Home worksheet has a place for the depreciation taken on line 9.

On Taxwise, the Sale of Your home worksheet is Sched D worksheet 2

If they only lived in it for 15 months, they would qualify for a partial exclusion.  Which may be enough depending upon the amount of the gain. In so many cases all of the gain is because of the depreciation, so there is no gain to exclude.

How long have they owned it?  If they had lived in it prior to the five years, those months can possibly count.  For military, the five years can be suspended for up to ten years.  You only need to look at this if the partial exclusion is not enough to exclude their actual gain.

[Possi]

They owned it since before 2012. Not sure exactly when they bought it. I'll look at it again tomorrow. I was thinking the military exclusion counted 100% but for the depreciation. 

[DANRVAN]

19 hours ago, Possi said:

15 months because of military deployments. 

For a married coupe, their exclusion is $312,400 since they lived in the home for 15 months (5000,000*15/24).

 

[Gail in Virginia]

On 8/28/2020 at 8:29 PM, Possi said:

They owned it since before 2012. Not sure exactly when they bought it. I'll look at it again tomorrow. I was thinking the military exclusion counted 100% but for the depreciation. 

I think the break for the military is that they can extend the five year period to up to fifteen years, such that they need to have lived in the house for two of the last fifteen years instead of two of the last five.  But I am not positive - not as many military in this end of the state as in your neck of the woods. 

[Lion EA]

I agree with Gail. I haven't prepared a return for a military member except in classes. But, the difference is NOT in the percentage. The benefit is the longer TIME in which to reside for 24 months out of 15 years or whatever the "military" timeframe is.

[Possi]

Thank you so much. 

I didn't know about the 15 year rule for military. I researched it on the military source site, and sure enough... as always... I'm still learning! I'll be learning when I retire in a few years! LOL 

https://www.militaryonesource.mil/financial-legal/tax-resource-center/special-tax-considerations/income-tax-and-rental-properties-when-military

[Hahn1040]

The bottom line is that no matter how large the exclusion, they have to pay tax on at least the portion of the gain based on the depreciation.  The exclusion only applies to the portion over that amount:

total gain: $100,000  Accumulated Depreciation: $60,000 amount eligible for exclusion: $40,000  Thus, the partial exclusion is more than enough even if they qualify for the suspension of the 2 out of 5 year rule.

total gain $40,000 Accumulated Depreciation: $60,000 amount eligible for exclusion: zero .  $40,000 taxed as unrecaptured 1250 gain: max of 25% 

based on 15 out of 24 months of residence.  Likely a partial gain is more than enough

[Possi]

3 minutes ago, Hahn1040 said:

The bottom line is that no matter how large the exclusion, they have to pay tax on at least the portion of the gain based on the depreciation.  The exclusion only applies to the portion over that amount:

total gain: $100,000  Accumulated Depreciation: $60,000

Correct. I always had that part. 

[Hahn1040]

I have a new wrinkle to this: What if they retire?

I have one:  They owned and lived in it 2008-2014.  started renting in 2014.  He retired in 2019

then sold the rental 2020.

121(d)(9)Uniformed Services, Foreign Service, and Intelligence Community

121(d)(9)(A)In General

At the election of an individual with respect to a property, the running of the 5-year period described in subsections (a) and (c)(1)(B) and paragraph (7) of this subsection with respect to such property shall be suspended during any period that such individual or such individual's spouse is serving on qualified official extended duty—

SO... does that mean the period was suspended from 2014 (start of rental) to 2019 (retirement) and then the 5-year period began again in 2019.  With that, they would have 15 months (2019-2020) plus 9 months prior to renting in 2014 for a total of 24 months to qualify for exclusion.  The gain is almost $80,000 after the 1250 unrecaptued depreciation.  So this will make a large difference.

OR does retirement just negate the suspended months and he goes back to rule for most people?

I've never had one like this... in most of my cases all of the gain is based on the depreciation... so there is nothing to exclude

I appreciate any input!

[Possi]

5 hours ago, Hahn1040 said:

I have a new wrinkle to this: What if they retire?

I have one:  They owned and lived in it 2008-2014.  started renting in 2014.  He retired in 2019

then sold the rental 2020.

121(d)(9)Uniformed Services, Foreign Service, and Intelligence Community

121(d)(9)(A)In General

At the election of an individual with respect to a property, the running of the 5-year period described in subsections (a) and (c)(1)(B) and paragraph (7) of this subsection with respect to such property shall be suspended during any period that such individual or such individual's spouse is serving on qualified official extended duty—

SO... does that mean the period was suspended from 2014 (start of rental) to 2019 (retirement) and then the 5-year period began again in 2019.  With that, they would have 15 months (2019-2020) plus 9 months prior to renting in 2014 for a total of 24 months to qualify for exclusion.  The gain is almost $80,000 after the 1250 unrecaptued depreciation.  So this will make a large difference.

OR does retirement just negate the suspended months and he goes back to rule for most people?

I've never had one like this... in most of my cases all of the gain is based on the depreciation... so there is nothing to exclude

I appreciate any input!

20 hours ago, Hahn1040 said:

 

Were they on "qualified EXTENDED duty" all that time, right up until they retired? 

 

[DANRVAN]

7 hours ago, Hahn1040 said:

I have a new wrinkle to this: What if they retire?

The clock stops during the suspended period and starts again when it ends.  The fact that he retired does not erase the suspended period.

So if your client retired on June 30 2019 and sold the house on June 30 2020,  he would look back four years from the date of his deployment in 2014 for a base period for the 2/5  year rule (assuming he meets the 50 mile rule of 121(d)(9)(C)(i)).