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Real Estate and Mil Family Tax Relief Act

hooflys

Well-Known Member
pilot
Contributor
Searched and didn't find anything relevant...

Is anybody familiar with the provision of the MFTRA that allows AD service members who buy property and are subsequently stationed >50mi from their former duty station (and property) an extension of the 5 year ownership and use period to 10 years? As I read it, a service member that meets the >50mi criteria need only occupy a property for 2 of the last 15 years in order to avoid paying capital gains when he sells.

https://www.irs.gov/uac/Highlights:--Military-Family-Tax-Relief-Act

https://www.irs.gov/publications/p523/ar02.html

I was looking at selling a condo because I'm coming up on that 5 year use limitation when I stumbled across that little tidbit, but nobody I've spoken to (mil or RE agent) has heard about it.

Anybody taken advantage of this? Thanks for any insight.
 

villanelle

Nihongo dame desu
Contributor
I've definitely heard of it, and it is part of our plan for our property. We haven't yet sold, but I did some reading on it a while back and my understanding was the same as yours. You get a 10 year extension on the typical 2 of 5 year rule, effectively making it 2/15.

Of course, even without it, you are only paying capital gains on any profit, and there are some other work arounds and favorable terms. But though I am not a tax professional and you should consult one, I don't think that matters if you are in the home 2/15 and living out of the area.
 

Spekkio

He bowls overhand.
but nobody I've spoken to (mil or RE agent) has heard about it.
Speak to an accountant. Your best bet might actually be the free one provided on base, since they will be most familiar with military tax deductions.
 

Spekkio

He bowls overhand.
Of course, even without it, you are only paying capital gains on any profit,
They use the depreciation you write off as a baseline. If you bought a $300k house and depreciated it to $250k over 10 years while renting it, then sell for 350k net after realtor fees, you owe the feds $15,000. Then depending on the state you owe them, too, on the remaining $85k, even if you are mil non-resident. Now you're walking away with $25-$30k on a house that sold for $70k more than you bought it for. Factor in property taxes, upkeep, and mortgage interest and you are in the red, badly.
 
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zippy

Freedom!
pilot
Contributor
Searched and didn't find anything relevant...

Is anybody familiar with the provision of the MFTRA that allows AD service members who buy property and are subsequently stationed >50mi from their former duty station (and property) an extension of the 5 year ownership and use period to 10 years? As I read it, a service member that meets the >50mi criteria need only occupy a property for 2 of the last 15 years in order to avoid paying capital gains when he sells.

https://www.irs.gov/uac/Highlights:--Military-Family-Tax-Relief-Act

https://www.irs.gov/publications/p523/ar02.html

I was looking at selling a condo because I'm coming up on that 5 year use limitation when I stumbled across that little tidbit, but nobody I've spoken to (mil or RE agent) has heard about it.

Anybody taken advantage of this? Thanks for any insight.

Is the condo profitable? If so why are you using a 5 year tax exemption as your motivation to sell? There are ways to minimize capital gains tax (tax exchange for example) so if you have a property that's profitable (appreciating and positive cash flow wise) there's little reason to be in a rush to dump it.
 

bert

Enjoying the real world
pilot
Contributor
They use the depreciation you write off as a baseline. If you bought a $300k house and depreciated it to $250k over 10 years while renting it, then sell for 350k net after realtor fees, you owe the feds $15,000. Then depending on the state you owe them, too, on the remaining $85k, even if you are mil non-resident. Now you're walking away with $25-$30k on a house that sold for $70k more than you bought it for. Factor in property taxes, upkeep, and mortgage interest and you are in the red, badly.
You left out what they saved on taxes by depreciating it (along with any other deductions while it was a rental), the mortgage deduction for any time they lived in it, and the rent they collected. I'd try that math again.
 

hooflys

Well-Known Member
pilot
Contributor
Is the condo profitable? If so why are you using a 5 year tax exemption as your motivation to sell? There are ways to minimize capital gains tax (tax exchange for example) so if you have a property that's profitable (appreciating and positive cash flow wise) there's little reason to be in a rush to dump it.
While month to month is cash flow negative (basically I'm out the property manager's fee), the unit's rate of appreciation and other benefits made it worthwhile to keep despite annual expenses. The 5 year tax exemption wasn't my only motivation. An impending tour overseas and the idea of liquidity was enticing. I thought about a 1031, but didn't like the idea that I had to buy another rental property in order to avoid capital gains.

Bottom line, knowing I have 15 instead of 5 years changes the game and I will likely hold onto it, all things considered.

Appreciate all the responses.
 

Spekkio

He bowls overhand.
You left out what they saved on taxes by depreciating it (along with any other deductions while it was a rental), the mortgage deduction for any time they lived in it, and the rent they collected. I'd try that math again.
The purpose of my post was to point out that 'the profit' is a much bigger number than you'd think, and it comes to a sizeable tax bill. Without going into a lot of variable details there is no way to come up with 'a number,' but in the hypothetical and simplified example I posted, being taxed on $100k of 'profit' in one year is a bigger liability than being taxed on $5k of depreciation per year over the course of 10 years. As for writing off mortgage interest, have two kids and with today's rates it won't even do anything for you.
 
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