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Armed Forces Get Home Sale Capital Gains
Tax Relief
by Kenneth R. Harney
With the war in Iraq winding down, Congress
finally passed long-awaited reforms to the home-sale
capital gains rules affecting members of the
U.S. military and Foreign Service before adjourning
for the Easter/Passover recess. The changes
to the tax code are expected to save thousands
of home-owning members of the military millions
of dollars per year in home sale taxes.
Separate versions of the Armed Forces Tax Fairness
Act passed the House and Senate, after more
than two years of delays and failed attempts.
Differences between the two bills were mainly--but
not completely--resolved before adjournment
last week. Once the Senate approves a final
version of the bill, it will go to the President
for signing and take effect immediately.
The legislation remedies one of the most glaring
inequities in the U.S. tax code: higher tax
burdens for homeowning military and Foreign
Service personnel who are assigned overseas
for exended periods. Under capital gains tax
rules adopted in 1997, all home sellers can
pocket tax-free up to $250,000 (single filers)
or up to $500,000 (married joint filers) of
their home sale profits, provided they have
owned and occupied their home as a "principal
residence" for two of the five years preceding
the sale.
Many members of the military or Foreign Service
have difficulty meeting the strictly-enforced
two-out-of-five-years rule, and end up paying
capital gains taxes on their sales. This is
because many of them serve overseas on extended,
multi-year assignments, then come home for short
periods before being reassigned to another location
far away from their homes. In the case of members
of the military, the assignments may be to bases
located in the continental U.S., but they still
require them to be absent from their properties.
Many of service families rent out their homes
while they are away--turning the properties
into investment-category assets ineligible for
residential capital gains breaks.
The net effect is that military and Foreign
Service homeowners frequently are not able to
accumulate two years worth of qualifying time
occupying their homes as principal residences.
Under the new legislation, their overseas or
domestic assignments will be "suspended" from
being counted against the two-out-of-five year
clock. For example, if you are in the military
and you own and occupy your house for a few
years before being sent on multiple assignments
overseas totalling five years, you'll now be
able to suspend those five years and count the
three to qualify under the capital gains rules.
The House version requires military personnel
to be on "qualified official extended duty"
to receive the suspension. That means a minimum
of 180 days at a "duty station" located at least
150 miles from the service members home or when
residing under government orders in government
quarters.
The amendments to the capital gains rules should
cover tens of thousands of homeowning military
and State Department families, according to
Capitol Hill tax experts, and will be retroactive
to 1997.
Published: April 21, 2003
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