All, if not most of us, know about the IRS rule that if you live in your home 2 of the last 5 years proceeding the sale date, that all gains are exempt from Federal Capital gains. What if I told you it only had to be 2 out of the last 10? Well it can be if you are active duty military, and had a PCS move. I am not an accountant, but I married a very smart one. I can't legally give tax advice, so I will quote the IRS Tax Law below.
Source: IRS Publication 3, Armed Forces Tax Guide, 2007 returns. Pages 10-11
"Rules for Sales in 2007
You generally can exclude up to $250,000 of gain ($500,000, in most cases, if married filing a joint return) realized on the sale or exchange of a main home in 2007. The exclusion is allowed each time you sell or exchange a main home, but generally not more than once every 2 years. To be eligible, during the 5-year period ending on the date of the sale, you must have owned the home for at least 2 years (the ownership test), and lived in the home as your main home for at least 2 years (the use test). Exception to ownership and use tests. You can exclude gain, but the maximum amount of gain you can exclude will be reduced if you do not meet the ownership and use tests due to a move to a new permanent duty station. 5-year test period suspended. You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty as a member of the Armed Forces. This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale.
Example. David bought and moved into a home in 1999. He lived in it as his main home for 2.5 years. For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. He then sold the home at a gain in 2007. To meet the use test, David chooses to suspend the 5-year test period for the 6 years he was on qualifying official extended duty. This means he can disregard those 6 years. Therefore, David's 5-year test period consists of the 5 years before he went on qualifying official extended duty. He meets the ownership and use tests because he owned and lived in the home for 2.5 years during this test period.
Period of suspension. The period of suspension can-not last more than 10 years. You cannot suspend the 5-year period for more than one property at a time. You can revoke your choice to suspend the 5-year period at any time.
Qualified official extended duty. You are on qualified official extended duty if you serve on extended duty either:
At a duty station at least 50 miles from your main home, or
While you live in Government quarters under Government orders.
You are on extended duty when you are called or ordered to active duty for a period of more than 90 days or for an indefinite period.
Property used for rental or business. You may be able exclude your gain from the sale of a home that you have used as a rental property or for business. However, you must meet the ownership and use tests discussed in Publication 523.
Loss. You cannot deduct a loss from the sale of your main home.
More information. For more information on the laws affecting the sale of a home in 2007, see Publication 523"
I hope this helps provide insight, or at least the location of the applicable tax law. Happy Holidays.
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