The Foreign Service Journal, January-February 2021

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2021 63 can result in an incorrect accounting method, which may require a change in accounting method (Form 3115) or an amended return, depending on the mistake made and/or the number of years depreciation was improperly reported on the Schedule E. AFSA recommends also reading Tax Topics 703 (basis), 704 (depreciation) and 414 (rental property); the Schedule E and Form 1040 instructions; IRC Sections 167 (depreciation), 1012 (cost basis), 1011 (adjusted basis) and 1016 (adjustments to basis); associated basis and depreciation regulations; and Publications 527 and 946. Selling a Principal Residence Taxpayers who sell real estate used as a principal residence at some time during the taxpayer’s ownership may qualify to exclude all or a portion of their net taxable capital gain under the provisions of IRC Section 121. A taxpayer who used the property as a principal residence and also rented the property can only exclude (if the qualifications are met) the non-IRC Section 1250 unrecaptured gain (see below) under IRC Section 121. IRC Section 121 allows a taxpayer to exclude up to $250,000 ($500,000 if married filing jointly) of long-term capital gain from the sale of a principal resi- dence. To qualify for the full exclusion amount, the taxpayer: (1) must have owned the home and lived there at any time for at least two of the last five years before the date of the sale (but see Military Families Relief Act, below); (2) can- not 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 mar- ried filing jointly) will owe capital gains tax on the excess. Additionally, capital gain attributed to periods of nonquali- fied use cannot be excluded under IRC Section 121. AFSA recommends Topic 701, Publication 523, IRC Section 121 and related regulations. Military Families Tax Relief Act of 2003 According to the Military Families Tax Relief Act of 2003, the five-year period to qualify for the exclusion under IRC Section 121 may be suspended for members of the Foreign Service for up to 10 years during which the taxpayer has been on a qualifying Foreign Service assignment. This act also excludes periods of “qualified official extended duty” from nonqualified use treatment. In addition to the recommended reading from the previous section, AFSA recommends IRC Sec. 121(d)(9) and 26 CFR Section 1.121-5.