Q: I have a friend who is in a bind. He is an active duty Marine. Less than 2 years ago he was transferred to Camp Lejeune and bought a home. He just received orders to report to Okinawa, Japan to report by the end of the month. His home is for sale and will sell soon.
The problem is that his property has appreciated somewhat and he will make a profit after his expenses are factored in. According to the IRS, you have to live in your house for 2 of the last 5 years in order to keep up to $250,000 in profits tax free.
Is there a special clause or waiver for someone in his situation where he can sell his home now and still receive his capital gains up to $250,000 per person tax free? Or is there any chance with his particular case that waiting until the two year mark before escrow closes that he may receive this capital gain tax free.
Also, if he is allowed to receive his gains tax free, is there a time limit established on how long he has to spend this capital gain?
A: The IRS allows homeowners to avoid having to pay any taxes on the gain from the sale of their home up to $250,000 for a single homeowner or $500,000 for married couples. However, the homeowner must have lived in the home as his or her principal residence for 2 years out of the last 5 years. If your friend has a gain from the sale of his home and it is less than $250,000, he would want to avoid having to pay federal income taxes on this profit.
But the IRS has some exceptions for people like your friend who have to move because of certain unforeseen circumstances, including death, divorce, taking a new job that is at least 50 miles from your previous job, health problems, and having twins or triplets. Other unforeseen circumstances include natural disasters and terrorist attacks, according to the IRS.
Your friend’s job change to Japan seems to qualify as an “unforeseen circumstance” and he should be entitled to get part of the exclusion. The IRS publication has a table your friend can use to determine the percentage of the $250,000 exclusion that he will be entitled to.
Here’s how to calculate his exclusion: If he lived in the property for 18 months, or 75 percent of the time needed to keep up to $250,000 in profits tax free, then he would be able to keep up to 75 percent of the $250,000 exclusion, or up to $187,500.
The formula would change if he had bought the home over 2 years ago, rented it for some time and then lived in it for some of the time. But unless there is something extraordinary about the situation, the IRS will allow some of the exclusion to be used by your friend.
As an additional consideration, as a member of the armed forces, if he decided not to sell the home, he could disregard that time that he moved out of the home and rented it while he was serving in Japan. When he is reassigned back in the states, the 5-year time period would be back in force.
There are certain rules he must follow, but the IRS effectively tells a member of the armed forces (Uniformed Services as the IRS refers to it), that they will be given a pass on the 5 year rule under certain circumstances.
The IRS offers a free booklet that explains the process of determining who qualifies for the exclusion and the various rules that must be complied with to avoid having to pay taxes on the gains from the sale of a home. Go to the IRS’s website, www.irs.gov, and look at Publication 523, “Selling Your Home.”
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