What: lived in one side of the duplex for two years and rented the other. Received orders and could not sell. Renting the duplex since 2008 has been stressful and would like to sell. Understand the military gets exception of 10 years to living in the home as a primary residence for two of the last five. Would like to confirm that I can sell the home as a primary residence without the tax penalties of a rental property?
If I can only sell the Side I lived in without tax penalties then how could I legally split the properties and sell one side. Additionally we have had to pay the utilities on both sides since 2008 as the utilities company will not accept separate payments for trash and water. Therefore I made monthly payments versus charging the tenants for the last 12 years. How can I legally split the properties? Please advise thank you, James
Thank you for your service to our nation. You are correct but there are some very specific criteria to be eligible for the program. Only a tax professional can tell you if you actually qualify for the stop the clock provision.
Under Section 121, the IRS allows a taxpayer to exclude the first $250,000 of capital gain ($500,000 for married couples filing jointly) on the sale of their primary residence if they meet certain ownership and use requirements. If you owned the home for at least 24 months of the 5 years leading up to the sale, you meet the ownership requirement. If the home was your primary residence for at least 730 days of the previous 5 years, you meet the use requirements. If you’re married filing jointly, you must each meet the use requirement, even if only one person meets the ownership requirement to qualify for the $500,000 exclusion.
Since PCS moves are a normal part of military life, IRS Publication 523 contains a specific clause for military personnel, referred to in IRS Publication 523 as “stop the clock.” What this means is that you can suspend the two year requirement for up to 10 years if you are on qualified active duty & ordered to move at least 50 miles from your residence. When combined with the 5 year test period, this can potentially be a total of 15 years. Keep in mind, this only applies if you meet the criteria for ‘qualified extended duty.’ If you end up moving back within 50 miles of the house, or are no longer on active duty, this clause is no longer in effect.
Talk with a tax professional or accountant to see if you meet all the eligibility criteria. There is a lot of money at stake here and you only have one opportunity to do this correctly. I'm going to repost under tax to see if anyone there has additional insight.
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