How to decide whether to keep or sell your house after PCS

A year out, price the house two ways

Start about 12 months before your last day. First, get a sale estimate from a real estate agent and a rent estimate from a property manager. Then pull the original closing statement and the receipts for improvements, because basis is the purchase price plus those improvements. Next, write your move-out date on the calendar and, beside it, the date 3 years later: that is the sale deadline if you lived there at least 2 years right up to move-out. After that, ask your mortgage servicer and the VA loan office the questions in the next section. Last, run the cash-flow test below before you sign any lease.

Which lender and insurer answers should worry you?

The answer that should worry you is a VA loan office saying your remaining entitlement won't cover the next home without a down payment. It means keeping the rental forces you to pull cash for the second-career house, often from the TSP or an IRA.

Ask the VA loan office how much entitlement stays tied up if you keep the house. Ask your insurer whether a tenant voids the homeowners policy (usually it does, and you'll need a landlord or dwelling policy). Ask the servicer whether the loan allows renting after a PCS. Get all three answers in writing.

How much does the rental really earn after vacancy and repairs?

After 1 vacant month, 10% management, the full mortgage payment and 1% of the home's value for repairs, a house that rents for $2,400 each month and is worth $430,000 loses about $3,340 a year. Rent alone rarely pays for itself once you count the costs of being an absent landlord.

Here is the arithmetic in the order you'd run it. Take monthly rent times 11, not 12, to allow for 1 vacant month. Subtract 10% of the rent you collect for a manager, because you won't be nearby once the second career starts. Subtract 12 mortgage payments, including taxes and insurance. Last, subtract 1% of the home's value for repairs. Plug your own rent, payment and home value into the calculator on this site and it does these four subtractions for you.

Terrence and Ivy, a hypothetical household, are 42 and 40. He's a Marine Corps master sergeant retiring after 20 years under High-3 and starting as a county 911 dispatch supervisor. She teaches second grade, and they have 2 kids under 12. Their house near his last duty station cost $330,000 and is worth about $430,000, a $100,000 gain. Eleven months of $2,400 rent brings in $26,400. Management takes $2,640. Twelve mortgage payments of $1,900 come to $22,800. Repairs at 1% of $430,000 are $4,300. So $26,400 minus $2,640, minus $22,800, minus $4,300 leaves a loss of $3,340 a year, about $280 each month.

Now run it as if Ivy were alone. Say Terrence dies in year 2. Ivy, on a second-grade teacher's pay plus the Survivor Benefit Plan annuity, would carry the $3,340 shortfall and be the landlord with 2 kids under 12. Ivy would still have to sell inside the 3-year window.

Quick test: if net rent after vacancy, 10% management and 1% repairs doesn't cover the full mortgage payment, keep the house only if you'd buy it today as an investment at today's price. Most households in Terrence and Ivy's position wouldn't.

Principal paydown and appreciation are real, but they aren't cash. If values near the old duty station slip 5%, Terrence and Ivy's $430,000 house is worth about $408,500, and roughly a fifth of their $100,000 gain is gone while they still cover the $280 monthly shortfall. Count equity only after it's sold.

The four-step cash-flow test

Ivy tests it alone

How long does the exclusion window last after retirement?

You have 3 more years after move-out, because the IRS wants you to have owned and lived in the home for 2 of the 5 years before the sale. The suspension of up to 10 years covers only time on qualified official extended duty, and it stops on retirement day.

The IRS rule lets you exclude up to $250,000 of gain ($500,000 married filing jointly) on a home sale. The usual paraphrase is 'military get 15 years.' The real suspension applies when you're stationed 50 or more miles away or ordered into government quarters. In the table below, the second column gives the actual rule, and each belief on the left turns out to be a shortened version of it.

Depreciation doesn't disappear inside the window. Depreciation taken after May 6, 1997 is taxed at up to 25% even when the rest of the gain is excluded. On a $275,000 building basis over 27.5 years, that is $10,000 each year.

Heirs get a different deal. Inherited property generally gets a basis stepped up to its value at death, which can wipe out built-in gain and depreciation recapture for the kids. That makes keeping the house until death a legitimate estate choice for some households. But it means being a landlord for decades, and that only works if the cash flow is positive.

What the IRS rule says

Depreciation and heirs

Years 2 and 3 decide most of the tax bill

Ivy's brother prepares their return as a favor. He tells them not to bother with depreciation, so there will be 'nothing to recapture.' It's a costly bit of advice. The IRS taxes depreciation 'allowed or allowable,' so the $30,000 from 3 years is taxed at sale anyway, up to $7,500, while Terrence and Ivy never got the deductions. Catch it each April by checking that Schedule E shows a depreciation amount.

Letting the 3-year date pass is the bigger slip. Selling in year 4 turns a tax-free $100,000 gain into about $15,000 of federal tax (assuming a 15% rate), plus the recapture. A homeowners policy left in place after a tenant moves in can mean a denied claim on a $15,000 roof.

Before First Command Financial Services agrees that a household should keep a rental, it checks that cash outside the TSP covers about 6 months of the rental's costs. That way a vacancy or a broken furnace never forces a TSP sale while stocks are down. Selling at that moment is the expensive mistake this firm cares about most, and a related article covers what it costs in dollars.

The relative's mistake

Cash outside the TSP

Before the 3-year mark, ask First Command Financial Services this

Bring your closing statement, your move-out date and a rent estimate to the first conversation. Then ask: 'If we keep the house past our 3-year date, what does the sale cost us in tax, and where does the cash come from in a bad year without selling TSP funds?' If you lived there less than 2 years, or you may move back in, say so first, because the exclusion math changes and some states tax the gain separately.