The Foreign Service Journal - January/February 2018

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2018 77 secondary residence may qualify for a deduction. The proper- ties for which a taxpayer would like to take this deduction must qualify as a home or a secondary residence. “Home” is the place where a taxpayer ordinarily lives most of the time. A secondary residence is a property the taxpayer does not rent out (or attempt to sell) during the year. Note that the structure claimed as a home or secondary residence may be any structure or vehicle that has sleeping, cooking and toilet facilities. (2) Points on a Mortgage: Taxpayers who claim the above deduction may also qualify to currently deduct all the points (prepaid interest) to obtain that mortgage. Nine requirements must be met to deduct those points. Taxpayers should con- tact a tax professional to see if and the extent to which they qualify and explore the possibility of partially deducting these points. Save the settlement sheet (HUD-1 Form) for documen- tation in case of an audit. (3) Business Use of Home, Including as a Rental: Tax- payers may be entitled to deductions for the business use of part of a home. (3)(a) Rental: When income is earned by renting out the home, deductions the taxpayer claims for mortgage interest remain deductible; however, they become an expense for the production of rental income instead of a personal deduction under the mortgage interest expense provisions (Schedule E rather than Schedule A). Depreciation, repair costs and operating expenses such as fees charged by independent contractors (e.g., groundskeepers, accountants, attorneys) are deductible. Limits apply to these deductions when the taxpayer uses their property for 14 days or 10 percent of the total days it is rented to others at a fair rental price, whichever is greater. (3)(b) The 1031 Exchange: Taxpayers who convert their homes to investment property (perhaps because they have inadvertently used it exclusively for business purposes for too long) may no longer qualify for the exclusion of up to $500,000 of capital gain on the sale of a principal residence CHILD CARE TAX CREDIT WHEN OVERSEAS To claim the child care tax credit while serving overseas, you must submit IRS Form 2441. Pursuant to the 2441 instruc- tions,“If you are living abroad, your care provider may not have, and may not be required to get, a U.S. taxpayer identi- fication number (for example, an SSN or Employer Identifi- cation Number). If so, enter ‘LAFCP’ (Living Abroad Foreign Care Provider) in the space for the care provider’s taxpayer identification number.”