The Foreign Service Journal, January-February 2019

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2019 73 example, deductions the taxpayer claims for mortgage interest remain deductible beyond the limits discussed above; 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). This distinction has new significance due to the limits on the cost of mortgage interest for personal use and the cap on state and local taxes. Amounts in excess of these limits may be deductible, as are depreciation, repairs and operating expenses beyond the above limits. Note that depreciation of business property must be accounted for and claimed in the tax year it occurs. Failure to do so will result in the loss of the deduction during the rental period of the property, but the taxpayer will still have to pay the IRS back for a depreciated basis when they eventually sell. AFSA recommends consulting a professional in addition to Topic 509, Publication 587, the instructions for Form 8829, and IRC Sections 162, 212 and associated regulations. Professional assistance will also be necessary for a possible IRC Section 1031 Exchange of like-kind, real property located in the United States, which is held for the production of income (not a per- sonal residence). Selling a Principal Residence A taxpayer may still exclude up to $250,000 ($500,000 if mar- ried filing jointly) of long-term capital gain (but not the afore- mentioned repayment of unclaimed rental depreciation) from the sale of a principal residence. To qualify for the full exclusion amount, the taxpayer: (1) must have owned the home and lived there for at least two of the last five years, beginning on the date first occupied, before the date of the sale (but see Military Families Relief Act, below); (2) cannot have acquired the home in a 1031 exchange within the five years before the date of the sale; and (3) 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. Taxpayers who sell their principal residence for a profit of more than $250,000 ($500,000 for married filing jointly) will owe capital gains tax on the excess. AFSA recommends Topic 701, Publication 523, IRC Sec. 121 and related regulations. Circular 230 Notice: Pursuant to U.S. Treasury Department Regulations, all 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 recom- mending advice on any tax-related matters.