Can capital gain from the sale of a rental property be excluded from total income if I am military? It was a primary residence in the last 5 years.

If you lived in the home and owned the home for two years prior to the date of sale, you can exclude the gain. You will still have to recapture depreciation.

Since PCS moves are a normal part of military life, IRS Publication 523 contains a specific clause for military personnel, referred to in IRS Publication 523 as “stop the clock.” What this means is that you can suspend the two year requirement for up to 10 years if you are on qualified active duty & ordered to move at least 50 miles you’re your residence. When combined with the 5 year test period, this can be a total of 15 years.  Keep in mind, this only applies if you meet the criteria for ‘qualified extended duty.’  If you end up moving back within 50 miles of the house, or are no longer on active duty, this clause is no longer in effect.

Generally, if the property was your primary residence for 2 of the last 5 years you owned it, counting back from the closing date of the sale, then you qualify for the capital gains tax exclusion. To be more precise, it's 730 days of the last 1826 days you owned it, and the days do not have to be consecutive.

For military, the day count for days it was your residence stops the date you vacate the property due to PCS orders. This is not necessarily the day you depart the area for your next assignment. Additionally, when relocated because of the PCS orders and lived in the property less than 730 days, you will be able to qualify for at least a partial exclusion based on the time you did live in it. Basically, you get 1/24 of the exclusion for each month it was your primary residence.

But do understand that the depreciation taken for the period of time it was a rental is not included in that exclusion. So you will be taxed on the recaptured depreciation no matter what.