Are Military Personnel Exempt From Capital Gains?

Some tax rules can create a unique prejudice against military personnel because service often involves a somewhat unorthodox way of life. This is particularly true where capital gains and real estate are concerned. If you serve in the military and can't meet certain rules to avoid capital gains tax when selling your home, a law passed in 2003 offers you special relief. You may even be able to amend an old return to capitalize on these special provisions if you've since retired, provided you do so within three years of the original return.

Capital Gains Tax Rates

The capital gains tax rate was a much-discussed aspect of the fiscal cliff deal signed into law in January 2013. In actuality, the rate didn't really change much. It's still 15 percent unless you earn more than $400,000, or $450,000 if you’re married and file a joint return.

Capital Gains Exemptions

Federal law allows spouses to exclude $500,000 in capital gains from the sale of a home under some circumstances. If you're single, the exemption is $250,000. If you qualify, you and your spouse could sell a home you purchased for $200,000 for $700,000 and not owe capital gains tax, provided you file a joint married return.

Timing Considerations

Qualifying for the capital gains exemption is where things can get dicey for military personnel. Tax law requires that you must own the property for at least two years, and you must live in it for two of the last five years to qualify, although the time does not have to be consecutive. Under the terms of the Taxpayer Relief Act of 1997, these conditions applied to service members as well. Realizing that service members often find themselves called to active duty so they must rent their homes and eventually sell before meeting these requirements, Congress revised the terms of the Act in 2003 to accommodate their special needs.

Military Provisions

Military personnel can effectively waive the two-year residency requirement under some circumstances. The two-year rule doesn't apply if they must rent their homes because they're on active duty, or even if they simply vacate their homes while they're away because they must serve. Service time is "suspended" for up to ten years of duty, so they can qualify for the capital gains exemption even if they were not able to live in the home for a sufficient period of time.

Qualified Duty

The special provisions for military personnel apply only for periods of qualified extended duty. This means you were stationed at least 50 miles from your residence after buying the home. You can also qualify if you're required to live in military housing for a period of 90 days or more, of if such a requirement is open-ended – you don't know exactly when you'll be able to return to your home.