Capital Gains Tax Military Exemption

Capital gains is the term applied to income generated by the sale of an asset, anything from stocks and bonds to jewelry and collectibles and, yes, real estate. Moreover, under the U.S. tax code, anything purchased and then resold for a higher price, is potentially subject to capital gains taxes.

Members of a military family may be dismayed to discover there are precious few carveouts in the world of capital gains taxes. Your investment gains in Wall Street, precious metals, collectible cars (or coins or firearms), and cryptocurrencies are treated the same as civilians.

The tax code is far gentler for members of the military, however, on the topic of real estate sales — specifically homes military personnel have used as investment property.

Understanding Capital Gains Tax

Because Congress traditionally has endorsed the notion of homeownership, the tax code offers generous treatment of capital gains realized from the sale of primary residences. Under the Home Sale Exclusion, the IRS allows individuals to exclude up to $250,000 of capital gains from the sale of their home ($500,000 for married couples filing jointly), provided certain eligibility criteria are met. The key hurdle: The dwelling must have been the owners’ primary residence for at least two of the previous five years before the sale.

The rule is universal: It applies to civilians and military alike.

“According to this rule, the house had to have been owned by you and been your primary residence for at least two of the last five years, though those years technically do not have to be consecutive,” said Adam Hamilton, CEO of Richmond, Va.-based REI Hub. This qualifies the home as a primary residence and allows for tax breaks.”

Here’s where it gets interesting for military personnel. IRS rules allow service members who own homes but are away from their property as a result of permanent change of station (PCS) orders to extend the five-year residency period an additional 10 years.

For instance, you’re a Navy pilot who buys a house in Norfolk, VA. and lives there for two years. Then Uncle Sam sends you off to see the world. Over the next dozen years, you’re stationed in Japan, Italy, Pensacola, and Corpus Christi, wisely taking advantage of the benefits of military housing and, even more wisely — because your family has tagged along — converting the Norfolk house into a rental.

Now you’re on the cusp of retirement, and maybe you’re keen, at last, to sell the house in Norfolk (which the St. Louis Federal Reserve says has appreciated roughly 63% in your absence). The 15-year look-back earned by your service has you covered. The Home Sale Exclusion applies.

When it’s time to sell, make certain you have fully accounted for your cost basis. There’s the price you paid, of course. You also may have incurred closing costs. Perhaps you renovated the kitchen, added a room (and/or a deck), and installed a pool. Those all add to your basis — the number you are allowed to subtract from the sales price, lowering the amount subject to capital gains.

Did you pay a sales commission? That, too, reduces your taxable profit.

One more caveat: You must take into account the tax consequence of keeping the Norfolk house as a rental: depreciation. The IRS requires you to claim depreciation (depreciation recapture) for each of the years your house was a rental.

Important note: If, instead of relying on military housing benefits in your far-flung deployments, you became a real estate investor — buying one house after another, and turning them into rentals when you left with fresh orders — know this: You cannot suspend time for more than one property at a time.

Beyond that, we are mum. Consult a tax professional for the ins and outs of capital gains vs. your life as an absentee landlord serving in defense of the nation.

Capital Gains Tax Exemptions

Capital gains is a target-rich field that presents assorted, if nuanced, opportunities for protecting investment profits from IRS collections. Chief among opportunities are exemptions and exclusions, separate entities that work in tandem, usually to the benefit of the taxpayer with a capital gain to declare.

Universal Tax Exemptions

The good news: For 2025, rates on realized capital gains (assets sold at a profit) held/owned for more than one year tend to be less onerous than taxes on regular income. These are the capital gains tax rates you’ll pay, based on your taxable income:

• Single: 0% up to $48,350; 15% between $48,351-$533,400; 20% for $533,401 and above.
• Head of household: 0% up to $64,750; 15% between $64,741-$566,700; 20% for $566,701 and above.
• Married filing jointly (or surviving spouse): 0% up to $96,700; 15% between $96,701-600,050; 20% for $600,051 and above.
• Married filing separately: 0% up to $48,350; 15% between $48,351-$300,000; 20% for $300,001 and above.

Depending on their filing status, taxpayers who profit from the sale of their primary residence may exclude either $250,000 or $500,000 of their capital gain. That exclusion is available to all taxpayers.

Other universal exemptions and exclusions include gains from certain tax-favored retirement accounts. Looking forward to your golden years? The IRS has a rule to sweeten the pot: Taxpayers 65 and older can increase their standard deduction by $1,600 ($3,200 for joint filers). Again, consult a tax professional for a full slate of exemptions and exclusions.

Capital Gains Tax Exclusion for Military Members

As noted above, military service personnel and their families are eligible for the same exclusions and exemptions afforded civilian taxpayers.

Capital gains exclusions for members of the military kick in when they embark on their permanent change of station (PCS). We’ve discussed the 15-year look-back.

“Active-duty military personnel … do get some more leeway here designed to help them out,” REI Hub’s Hamilton said. “Instead of two-out-of-five years, that five can be extended to 15 if they were ordered to move or placed on extended duty.

“Because military personnel can have far less control over their living situation and thus may not be able to live in a home for two out of five years, they are able to qualify for those capital gains tax reductions if they live in the home for at least two of the preceding 15 years.”

The Bottom Line

When the time comes to sell your (current or former) home, make certain you have documents to support your claims of residency and that the dwelling’s cost basis is gathered and organized.

To familiarize yourself with the process, review IRS publications, especially Topic No. 701, Sale of your home. Publication 523 describes the process in detail.

When the time arrives for filing your taxes, most sales, including sales of homes, require taxpayers to complete Form 8949, Sales and Other Dispositions of Capital Assets; and provide a summary of capital gains (and deductible capital losses) on Schedule D (Form 1040).