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Military Housing Benefits: Buying vs Renting and Tax Rules

Military Housing Benefits and Smart Decisions About Buying vs. Renting

As a member of the military, you have likely experienced frequent moves due to your Permanent Change of Station (PCS) orders.

One of the most important decisions you will make during your service is where to live. You have the option of living on-base, renting, or buying a home.

In this article, we will explore military housing benefits and provide you with some smart decisions about buying vs. renting.

Military Housing Benefits

Basic Allowance for Housing (BAH)

The Basic Allowance for Housing (BAH) is a tax-free housing allowance for military members. The monthly amount is based on your rank, zip code, and whether you have dependents.

The purpose of BAH is to provide you with enough money to cover your rent or mortgage payments. If you choose to rent, your BAH will be applied towards your monthly rent.

However, if you choose to buy a home, your BAH will be applied towards your monthly mortgage payments. To determine how much BAH you are eligible for, you can use the BAH calculator on the Defense Travel Management Office website.

VA Loan

If you decide to buy a home, the VA loan is an excellent option for military members. The VA loan is a no down payment mortgage that is backed by the Department of Veterans Affairs.

To be eligible for a VA loan, you must meet certain requirements, including having served at least 90 consecutive days of active duty during wartime or 181 days of active duty during peacetime. When you apply for a VA loan, you will need to pay a funding fee, which is a percentage of the loan amount.

The funding fee helps to offset the cost of the loan and keep the program self-sustaining. Before you apply for a VA loan, it’s a good idea to get pre-approved.

This will give you an idea of how much you can afford and whether you meet the eligibility requirements. You will also need to have the home appraised to ensure that it meets the VA’s minimum property requirements.

Interest Rate Reduction Refinance Loan (IRRRL)

If you already have a VA loan and want to refinance, the

Interest Rate Reduction Refinance Loan (IRRRL) is an option. The IRRRL is a streamlined refinance program that allows you to refinance your existing VA loan with a lower interest rate.

To be eligible for the IRRRL, you must have an existing VA loan, be current on your mortgage payments, and have a good payment history for the past 12 months.

Considerations Before Buying

Before you buy a home, there are several considerations to keep in mind, including housing prices, PCS orders, landlords, and the rental market.

Housing Prices

Housing prices can vary greatly, depending on the location. Before you buy a home, consider the housing market in the area where you will be stationed.

Some areas may be more expensive than others, making it difficult to find an affordable home.

PCS Orders

When you receive PCS orders, you will need to decide whether to rent or sell your home. If you sell your home, you will need to factor in the cost of selling, such as real estate commissions and closing costs.

Landlords

If you decide to rent, it’s important to find a good landlord. Do your research and read reviews before signing a lease.

You can also ask for referrals from other military members in the area.

Rental Market

The rental market can vary greatly depending on the location. Before you rent, research the rental market in the area where you will be stationed.

Look at rental prices and availability to see if renting is a viable option.

Estimate Costs for Rental Property

If you decide to rent a property, it’s important to estimate the costs associated with renting. This includes management fees, insurance, taxes, utilities, and an emergency fund.

Management Fees

If you rent through a property management company, you will need to pay a management fee. The fee can vary but is typically around 10% of the monthly rent.

Insurance

As a renter, you will need to have renters insurance. Renters insurance typically covers damage to your personal property and liability in case someone is injured on your property.

Taxes

As a renter, you will not pay property taxes. However, your landlord will pay property taxes, which are factored into your monthly rent.

Utilities

As a renter, you will need to pay for your utilities, including electricity, water, and gas.

Emergency Fund

As a renter, it’s important to have an emergency fund in case of unforeseen circumstances. Aim to save at least three months of rent in your emergency fund.

Conclusion

In conclusion, military housing benefits and smart decisions about buying vs. renting are important considerations for military members.

By understanding your options and estimating costs, you can make an informed decision about where to live during your service. Remember to use the BAH calculator, consider the VA loan, and do your research before buying or renting a property.

With a little planning, you can find a home that meets your needs and fits your budget.

Special Tax Rules for Military Home Sales

As a military member, you may experience frequent moves due to your Permanent Change of Station (PCS) orders. When you sell your home, there are special tax rules that apply to military home sales.

In this article, we will explore the two special tax rules for military home sales, including the suspension of the five-year test and the exclusion from income taxes.

Suspension of Five-Year Test

Normally, to qualify for the exclusion from income taxes on the sale of your home, you must meet the five-year test. The five-year test requires that you have owned and used your home as your primary residence for at least two out of the previous five years before the sale.

However, as a military member, you may suspend the five-year test if you meet the qualified official extended duty (QOED) requirement. According to IRS Publication 3, Armed Forces Tax Guide, QOED is “any period of extended duty while serving at a duty station at least 50 miles away from the residence or while residing under government orders in government quarters.”

The suspension of the five-year test means that you do not have to meet the two-out-of-five-year ownership and use requirements if you sell your home during a period of QOED.

This suspension can apply to multiple periods of QOED. It’s important to note that the maximum suspension period is ten years.

If you sell your home after ten years of QOED, you must meet the two-out-of-five-year ownership and use requirements to qualify for the exclusion from income taxes. Exclusion from Income

Taxes

If you sell your home and meet the ownership and use requirements, you may qualify for the exclusion from income taxes on your home sale profits.

Under this exclusion, you can exclude up to $250,000 of home sale profits if you are a single taxpayer, or up to $500,000 if you are married filing jointly. To qualify for the exclusion, you must meet the following requirements:

– Ownership: You must have owned the home for at least two out of the previous five years before the sale.

– Use: You must have used the home as your primary residence for at least two out of the previous five years before the sale. – Timing: You must not have used the exclusion in the previous two years before the sale.

– Married Filing Jointly: If you are married filing jointly, both you and your spouse must meet the ownership and use requirements. If you meet these requirements, you can exclude up to $250,000 or $500,000 of home sale profits from your income taxes, depending on your filing status.

This exclusion applies only to your primary residence, not to investment properties. It’s important to note that this exclusion applies only to civilians as well, but not to military members.

Instead, military members may take advantage of the suspension of the five-year test if they meet the QOED requirement.

Conclusion

In conclusion, there are special tax rules that apply to military home sales. Military members may suspend the five-year test if they meet the QOED requirement, which means they do not have to meet the two-out-of-five-year ownership and use requirements if they sell their home during a period of QOED.

Additionally, homeowners may be able to exclude up to $250,000 or $500,000 of home sale profits from their income taxes, depending on their filing status and whether they meet the ownership and use requirements. Understanding these special tax rules can help you make informed decisions when selling your home during your service.

In summary, as a member of the military, there are several key considerations to keep in mind when it comes to housing and taxes. Understanding military housing benefits, making smart decisions about buying vs.

renting, and knowing the special tax rules for military home sales can help you make informed decisions and ensure that you take advantage of any available benefits or exemptions. By using resources such as the Basic Allowance for Housing (BAH) calculator and the Armed Forces Tax Guide, you can make informed decisions about your housing and tax situations.

Remember to research your options, estimate costs, and seek guidance when needed. By doing so, you can find a home that fits your needs and budget while also maximizing any applicable tax exemptions.

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