Military Capital Gains Exclusion on Sale of a Rental Property

[taxn00b]

TP lived in a home as a personal residence for two years.  Received military orders to move to another state and turned the residence into a rental property.  8 years later, they have sold the rental property for a gain.  How do I designate that this gain should not be taxed due to the TP being on qualified extended duty?

[Possi]

The depreciation must still be re-captured, remember that first. 

Other CG can be exempt. 

I'm not sure the mechanics with ATX, but someone will chime in on this. 

[taxn00b]

Thank you!  Yes, I will make sure that the depreciation is recaptured (although, I don't think that they took all that was allowable...).

[Margaret CPA in OH]

Sadly I believe the term is 'allowed or allowable.'  Thanks for bringing up this situation as I have now learned about the qualified extended duty exception.  In 25 years, I've never actually had an enlisted client other than my son in the National Guard.

[taxn00b]

1 minute ago, Margaret CPA in OH said:

Sadly I believe the term is 'allowed or allowable.'  Thanks for bringing up this situation as I have now learned about the qualified extended duty exception.  In 25 years, I've never actually had an enlisted client other than my son in the National Guard.

Yes, that was what I thought as well...

[Hahn1040]

For active duty military and Foreign Service Officers and a few other special exceptions, the  5 years can be suspended for up to 10 years.  Sometimes it can get complicated if they own and sell other houses in those years.  Some military people buy a house every time they PCS... then get orders the day after they have unpacked the last box.

Indeed, you have to calculate the depreciation that they should have taken for the property even if the amount they actually deducted was less,  If they deducted more then use what they actually deducted.  Yes, I have seen this.  Particularly with military... they go to a different preparer each year and it is not always entered consistently.  I have seen where a t/p deducted a different amount each year for 5 years on a rental house ! Ugh!

On ATX in Fixed assets on the disposition tab right under expense of disposition there is a box to check for personal residence. then you go to the worksheet on the 8949.  This will put it on the 4797.  Some people will use the disposition tab to take it out of service and then report it on the 8949 Sale of Residence worksheet.

The main thing is that it excludes the appropriate gain and reports the depreciation as unrecaptured  Section 1250 gain on line 19 on Schedule D.

Sometimes the gain is less than the depreciation allowed or allowable.  In that case, there is no gain to exclude but the  unrecaptured  Section 1250 on line 19 of Schedule D is no more than the actual gain.