Capital Gains selling a home that is used as a rental- Military "service" question on retirement

Hello, I don't have a CPA to ask & I read through Pub 523 but it omits the crux of what I'm asking.

Q: if you retire from the military are you still considered a service member for the purposes of suspending up to 10yrs of the 5/2 rule for owning your home and then using it for a property rental.  Or does the day you retire stop the clock to use this 10yr suspension provision?


Example, bought house in 2011, lived 3 yrs and now have rented it out for 2 yrs due to military relocation. I see that I could sell in 2016 with no capital gains due to 5/2 rule.  However, I believe I could keep renting it for longer and use the 10yr suspension caveat and still not pay capital gains.  But if I retire in 2017 does that limit my options to say rent and sell in 2024 and still avoid capital gains? thanks..


I’m not a CPA (and I didn’t stay at a Holiday Inn Express last night either!) and it sounds like it would certainly be a great time for you to track one down to help you understand all the tax implications of selling your rental.


As you know the tax code allows military homeowners on “qualified extended duty” to suspend the five-year test period for up to 10 years.   If you peruse Section 121 of the IRS code you’ll note that the definition of “extended duty” is specified as, “any period of active duty.” 


Using this definition, your suspension would end on your retirement date. In your scenario, you would be able to disregard 2014, 2015 and 2016 for purposes of the test, but the clock would start again upon your retirement in 2017.  So, the date of the sale would have to be less than three years after you retire (2020) to meet the two of five year test (since you owned and lived in the home for the two years directly before your orders sent you elsewhere). Hope that info helps, but  again,  I’d encourage you to seek out a CPA.


JJ,  Thanks so much for your response. The reference you cited was great & helped to confirm my suspicions on the correct answer of "Service-Active Duty-Retired" caveats... (that is a great benefit while serving on Active Duty- I know many people that just/only reference the 2/5 rule.  I had surfed all day Sunday but couldn't quite nail it down, will still check with CPA when I get serious about selling.  But it looks like I have a few more years to decide.  Thanks again- Todd 

You're welcome and good luck!