The Foreign Service Journal, January-February 2017

66 JANUARY-FEBRUARY 2017 | THE FOREIGN SERVICE JOURNAL AFSA NEWS see Military Families Relief Act below); (ii) cannot have acquired the home in a 1031 exchange within the five years before the date of the sale; and (iii) cannot have claimed this exclusion during the two years before the date of the sale. An exclusion of gain for a fraction of these upper limits may be possible if one or more of the above requirements are not met. A taxpayer who sells their principal residence for a profit of more than $250,000 ($500,000 married filing jointly), or a reduced amount, will owe capital gains tax on the excess. (4)(b) Military Families Tax Relief Act of 2003: The five- year period described above may be suspended for members of the Foreign Service by any 10-year period during which the taxpayer has been away from the area on a Foreign Service assignment, up to a maximum of 15 total years. Failure to meet all of the requirements for this tax benefit (points (i) through (iii) in the Selling a Principal Residence section above) does not necessarily disqualify the taxpayer from claiming the exclusion. However, the services of a tax professional will probably be necessary if one of these requirements is not met. (4)(c) Adjustments to the Basis of a Home: (i) Buying or Building a Home: Some investments in the con- struction of a home, purchase of a home, improvements during ownership and improvements in preparation to sell must be added to the basis of the home. The starting point is the amount paid to acquire the property: cost basis. Some settlement fees and closing costs may be added to the cost basis (yielding the adjusted basis). These include abstract of title fees, charges for installing utility services, legal fees for the title search and preparing the sales contract and deed, recording fees, survey fees, transfer or stamp taxes and title insurance. A taxpayer who builds a home may add the cost of the land and the cost to complete the house to arrive at an initial cost basis. Construc- tion includes the cost of labor and materials, amounts paid to a contractor, architect’s fees, building permit charges, utility meter charges and legal fees directly connected with building the house. (ii) Improving a Home During Ownership: During the owner- ship period, improvements to the home including additions (bedrooms, bathrooms, decks), lawn and grounds improve- ments (landscaping, paving a driveway), improvements to the exterior (stormwindows, new roof, siding), insulation, plumbing, interior improvements (built-in appliances, kitchen modifica- tions, flooring) and investments in the home systems (heating, central air, furnace) may all be added to adjust the basis of the home upward. (iii) Preparing to Sell: “Fixing-up costs” no longer exist insofar as they refer to what was once recognized as a 1034 exchange of a residence. Capital expenditures continue to operate as described above when a taxpayer is preparing to sell a home. Any capital improvements when preparing to sell should simply be added to the adjusted basis and subtracted from the sales price to reduce net capital gain when the home is sold. (iv) Selling: Selling expenses can be subtracted from the sales price, further reducing the taxable gain. These include fees for sales commissions, any service that helped the taxpayer sell the home without a broker, advertising, legal help, and mortgage points or other loan charges the seller pays that would normally have been the buyer’s responsibility. C i r c u l a r 230 No t i c e : Pursuant to U.S. Treasury Department Regulations, all state and federal tax advice herein is not intended or written to be used, and may not be used, for the purposes of avoiding tax- related penalties under the Internal Revenue Code or promoting, marketing or recommending advice on any tax-related matters addressed herein. n TAX WITHHOLDING WHEN ASSIGNED DOMESTICALLY In 2014, the State Department instituted new procedures to comply with Treasury regulations for withholding state taxes for all employees serving domestically. (See Department Notice 2014_11_016, dated Nov. 3, 2014.) This means state taxes will be withheld for an employee’s “regular place of duty”—in other words, your official duty station. If you require state taxes to be withheld for a state other than that of your official duty station, your bureau executive director must provide a certification to the department’s Bureau of the Comptroller and Global Financial Services. This does not mean that you must relinquish your state of domicile if it is different than your official duty station. “Domi- cile” (legal residence) is different from“residence,” and so long as you maintain your ties to your home state you will be able to change your withholdings, if you so wish, back to your home state when you go overseas again. See the Overseas Briefing Center’s guide to Residence and Domicile, available on AFSA’s website at www.afsa.org/domicile. Bear in mind, too, that CGFS does not adjudicate state income tax elections when you are serving overseas, since in those circumstances it is the employee’s responsibility to accurately elect state income taxes. However, upon the employee’s return to a domestic assignment, CGFS will evaluate the employee’s state tax withholding election based on his or her new official domestic duty station.