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IRS Says Partial Tax Break OK For Service Members' Home Sales

American Forces Press Service

WASHINGTON, Feb. 3, 2003 – The Internal Revenue Service recently clarified a home sales rule affecting service members seeking a capital gains tax exemption worth up to nearly $500,000 for a couple.

The IRS said service members can claim partial exemptions if military duty interfered with their ability to comply with the exemption's two- year residency rule.

The income tax rule in question said home sellers could claim the full exemption only by owning and living in the house for at least two years out of the previous five. Sellers who couldn't meet that rule could still qualify for a partial exemption if, among other things, they sold because of a change in the place of employment of 50 miles or more.

The rule made no explicit mention of exceptions or relief for service members moving on official military orders. The IRS clarification, in essence, gives service members the same status as any other early seller eligible for a partial exemption.

The amount of the partial exemption is based on how many days of the 730 (two years) required were met before the sale. For example, one year of residence would merit 50 percent of the tax exemption, which would mean an exemption of up to $125,000 for an individual and $250,000 for a couple.

Tax reporting and treatment of full and partial exemptions are discussed in IRS Publication 523, "Selling Your Home." It's accessible and downloadable online at www.irs.gov/pub/irs-pdf/p523.pdf.

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