Housing Breaks That Are Available to Military Members and Their Families
One of the most challenging things for military families can be the frequent moves. But members of the military can also receive special housing benefits, including tax breaks, low-interest loans, and no down payment mortgages. Here’s how to make the most of these benefits in your housing decisions.
Tax-Free Housing Allowance
Service members and their families may be able to live in military housing, or they can receive a tax-free housing allowance with the monthly amount based on their rank, number of dependents and the cost of living in their area. They can use this housing allowance, called the Basic Allowance for Housing (BAH), either for rent or for mortgage payments. You can look up the BAH amounts based on zip code and rank with the Department of Defense’s BAH calculator. For example, a Second Lieutenant in Fayetteville, North Carolina, could receive a monthly housing allowance of $1,149 without dependents, or $1,359 with dependents in 2021.
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If you’re thinking about buying a house, keep the size of your housing allowance in mind as you calculate how much you can afford in monthly payments. Also keep this number in mind if you end up moving and renting out the house — you may have more prospective renters if the monthly rent you charge is within the BAH amount for many service members in the area.
No Down Payment Mortgages
If you’ve served on active duty for at least 24 months since Aug. 20, 1990, then you can be eligible for the VA loan. VA loans are government-backed mortgages with competitive rates and, most important, you can buy a house with no down payment and no private mortgage insurance (PMI). With most other types of mortgages, homebuyers need to make a down payment of at least 20% or they need to buy PMI, which tends to cost 0.5% to 1.5% of the loan amount every year. You may be eligible for a VA loan if you served less than 24 months during certain periods of wartime before 1990, if you were discharged because of a service-connected disability or other eligible reasons. See the VA’s eligibility requirements for VA home loan programs for more information about who qualifies.
If you have a VA loan and want to refinance to take advantage of falling interest rates, you may be able to reduce your rates and your payments with an interest rate reduction refinance loan. See the VA’s IRRRL guide for more information.
Smart Decisions About Buying vs. Renting
Before you buy a house with a VA loan and no down payment, think carefully about what you will do if you have to move. If housing prices in your area are low or even stable, you could end up owing more money on the mortgage than you can get from selling the house, especially after factoring in closing costs.
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Many military families rent out their homes when they receive Permanent Change of Station (PCS) orders, especially if they ultimately plan to return to the area. Before buying a house when you’re in the military, think about whether you’d like to be a landlord and assess the local rental market. In areas with a lot of military families moving in and out, it may be easy to rent your home to a service member with a stable military income and housing allowance. Consider the size of the BAH that service members typically receive in your area when setting your rental price. Estimate the costs you’ll need to pay to maintain the rental property, such as a management fee if you have to move far away and hire a property manager (which is often 10% of the monthly rent) and insurance, taxes and any utilities you’ll continue to pay. Build up an emergency fund to cover extra costs for the rental property.
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Special Tax Rules for Military Home Sales
Civilians generally need to live in a home for two out of the past five years in order to exclude up to $250,000 if single (or $500,000 if married filing a joint return) in home sale profits from income taxes. But many military families end up renting out their homes for longer and may not be able to move back within that timeframe. The IRS gives military families extra time to qualify for the tax break — they can suspend the five-year test for up to 10 years while they are serving on “qualified official extended duty,” which means they are serving at a duty station at least 50 miles from their main home or are living in government quarters under government orders during that time. For more information, see IRS Publication 3, Armed Forces Tax Guide.
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