Lewes CPA
officeProgar & Company, P.A.
Certified Public Accounting services for businesses and individuals
Tax relief for Peace Corps volunteers and employees in the Heroes
Earnings Assistance and Relief Tax Act of 2008
Dear Reader,
The recently enacted “Heroes Earnings Assistance and Relief Tax Act
of 2008” (the 2008 Heroes Act) contains a wide-ranging package of
tax cuts for military personnel and veterans. In addition, a
provision in the 2008 Heroes Act will potentially enable more Peace
Corps employees and volunteers to qualify for the homesale exclusion
on the sale of their principal home. Here are the details of the new
provision affecting Peace Corps volunteers.
An individual taxpayer may exclude up to $250,000 ($500,000 if
married filing a joint return) of gain realized on the sale or
exchange of a principal residence. To be eligible for the exclusion,
the taxpayer must have owned and used the residence as a principal
residence for at least two of the five years ending on the sale or
exchange. A taxpayer who fails to meet these requirements by reason
of a change of place of employment, health, or, to the extent
provided under regulations, unforeseen circumstances is able to
exclude an amount equal to the fraction of the $250,000/$500,000
that is equal to the fraction of the two years that the ownership
and use requirements are met.
There are special rules relating to members of the uniformed
services, members of the Foreign Service of the United States, and
employees of the intelligence community that allow for an option to
suspend the five-year test period for ownership and use during any
period these individuals or their spouses serve on qualified
official extended duty. This means that they may be able to meet the
two-year use test even if, because of their service, they did not
actually live in the home for at least the required two years during
the five-year period ending on the date of sale. The five-year
period can't be extended by more than ten years.
Under the 2008 Heroes Act, a new rule is created for Peace Corps
volunteers and certain employees similar to the rules that already
apply to the uniformed services, Foreign Service, and intelligence
community. Under this new rule, which is effective for tax years
beginning after December 31, 2007, an individual may elect to
suspend for a maximum of ten years the five-year test period for
ownership and use during certain periods that the employee or
volunteer is serving outside the U.S.. If the election is made, the
five-year period ending on the date of the sale or exchange of a
principal residence does not include the period up to ten years
during which the taxpayer or the taxpayer's spouse is serving as a
Peace Corp volunteer or employee.
For example, let's say that Betty bought and moved into a home in
2002. She lived in it as her main home for two and one-half years.
For the next four years, she did not live in it because she was
serving outside the United States as a Peace Corps volunteer. She
then sells the home at a gain in 2008. To meet the use test, Betty
chooses to suspend the five-year test period for the four years she
was serving in the Peace Corps. This means she can disregard those
four years. Therefore, Betty's five-year test period consists of the
five years before she went on qualified official extended duty in
the Peace Corps. She meets the ownership and use test because she
owned and lived in the home for two and one-half years during the
testing period.
I hope this information is helpful. If you would like more details
about this provision or any other aspect of the new law, please do
not hesitate to call.