Capital Gains Exclusion for Personal Real Estate - The 10 Year rule for U.S. government personnel posted overseas.

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Topic Author
Vienna
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Joined: Sat Jan 13, 2018 3:27 am

Capital Gains Exclusion for Personal Real Estate - The 10 Year rule for U.S. government personnel posted overseas.

Post by Vienna »

The IRS enables various U.S. Federal government employees, who are posted overseas on official assignments, to suspend the "2 in 5 years" test for selling one's personal residence and exempting capital gains from taxation.

(Simply put, to shield capital gains on the sale of one's residence, one normally must have lived in the residence for 2 of the previous 5 years).

The rule for those posted overseas, enables you to stop the clock for up to 10 years so that while you are working for the Federal government overseas you can preserve the 2-in-5 years window while you are away--for up to 10 years.

My question, for anyone who has insight into this is: if one returns from an overseas Federal assignment and has a hiatus for a number of months while waiting for a new assignment, does your 10 year exemption period stop, thus requiring you to sell your property immediately in order to preserve its capital gains exclusion?

This wouldn't seem to make sense, thus my question.
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MP123
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Re: Capital Gains Exclusion for Personal Real Estate - The 10 Year rule for U.S. government personnel posted overseas.

Post by MP123 »

Vienna wrote: Tue Feb 07, 2023 9:14 am My question, for anyone who has insight into this is: if one returns from an overseas Federal assignment and has a hiatus for a number of months while waiting for a new assignment, does your 10 year exemption period stop, thus requiring you to sell your property immediately in order to preserve its capital gains exclusion?
Here's Section 121:
https://www.law.cornell.edu/uscode/text/26/121

And the relevant portion:
(9)Uniformed services, Foreign Service, and intelligence community
(A)In general
At the election of an individual with respect to a property, the running of the 5-year period described in subsections (a) and (c)(1)(B) and paragraph (7) of this subsection with respect to such property shall be suspended during any period that such individual or such individual’s spouse is serving on qualified official extended duty—
(i)as a member of the uniformed services,
(ii)as a member of the Foreign Service of the United States, or
(iii)as an employee of the intelligence community.
(B)Maximum period of suspension
The 5-year period described in subsection (a) shall not be extended more than 10 years by reason of subparagraph (A).
So it sounds to me like the 5 year period would run during the period one was living at the primary residence waiting for another assignment, but the period that one was actually on official extended duty would not count, up to a maximum of 10 years.
MarkNYC
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Re: Capital Gains Exclusion for Personal Real Estate - The 10 Year rule for U.S. government personnel posted overseas.

Post by MarkNYC »

IMO, based on the language in Sec 121(d)(9), the 5-year ownership/use period for the principal residence exclusion can be suspended more than once due to "qualifying official extended duty", but the aggregate of all suspended periods for one property cannot exceed 10 years. A several month hiatus in between suspended periods would probably not be included in any suspended period.
Topic Author
Vienna
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Joined: Sat Jan 13, 2018 3:27 am

Re: Capital Gains Exclusion for Personal Real Estate - The 10 Year rule for U.S. government personnel posted overseas.

Post by Vienna »

Thanks for your responses!
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