or services or sold, exchanged, or otherwise disposed of any digital asset or a financial interest in any digital asset during 2024. The draft 2024 Schedule 1 introduces a specific line for reporting digital assets received as ordinary income not reported elsewhere. In addition to confirming if a reportable transaction occurred during 2024, readers must be sure to complete the forms necessary to report the transaction when required, along with any resulting income or deductions. Further, digital assets held in accounts outside the United States should be reported as a foreign asset on the FinCen114 (FBAR) and Form 8938 if reporting thresholds are met. Although foreign accounts that only hold digital assets are not currently required to be reported on the FBAR, FinCen Notice 2020-2 states that FinCen intends to amend the FBAR regulations to include digital assets as FBAR reportable accounts. The IRS has provided FAQs related to digital assets, which can be found at https://www.irs.gov/individuals/internationaltaxpayers/frequently-asked-questions-on-virtual-currencytransactions. Readers should particularly note that taxpayers who use digital assets to pay for goods or services or who sell digital assets must report the transaction(s) on their income tax return. Taxpayers who receive digital assets as payment for services must report the digital assets received as income on their tax return. Digital assets that a taxpayer holds as an investment is generally taxed as a capital gain or loss, as described in the preceding section. Many other types of digital asset transactions must also be reported on the taxpayer’s tax return. During 2024, the IRS released final regulations covering digital assets, which include the elimination of the universal wallet for basis tracking beginning Jan. 1, 2025. The IRS subsequently issued Rev. Proc. 2024-28 detailing safe harbor procedures to ease the transition from universal wallet basis tracking. AFSA recommends consulting IRS Notice 2014-21 as modified by IRS Notice 2023-34, Revenue Ruling 2019-24, Revenue Ruling 2023-14, Rev. Proc. 2024-28, specific to NFTs IRS Notice 2023-27, and the FAQs to determine the tax treatment, if any, of a transaction. Investments in Real Estate Taxpayers generally invest in real estate in five scenarios: Scenario 1: To live in as their personal residence. Scenario 2: For use as a vacation home. Scenario 3: To live in as their personal residence but rent out at times when not living in it. Scenario 4: To rent to a third party strictly for investment income purposes with no personal use. Scenario 5: To rent as a short-term rental (e.g., Airbnb). Adjusted Basis In all five real estate investment scenarios, it is important to properly calculate the adjusted basis of the property. Please refer to Tax Topic 703; Publication 551; Form 1040 Schedule D with instructions; IRC Sections 1011, 1012, and 1014 through 1017; and associated tax regulations beginning at 26 CFR Sec. 1.1012-1. Scenario 1: Personal Residence Never Rented. While living in the property as a personal residence, a taxpayer may deduct mortgage interest and property taxes as an itemized deduction on Schedule A, subject to limitations. Current tax law allows a taxpayer to deduct mortgage interest on qualifying debt up to current mortgage limits ($375,000 MFS / $750,000 MFJ unless the mortgage meets the requirements for grandfathered mortgage limit of $500,000 MFS / $1 million MFJ) for up to two properties: a personal residence and a second home personally used by the taxpayer. Interest paid on home equity loans (including popular HELOCs) is no longer deductible unless the proceeds from the loan are used to buy, build, or substantially improve the property on which the HELOC is taken, and the total mortgage loan balance (including home equity loans) stays within the permitted mortgage limits. Readers should note that proceeds from a cash-out refinance or personal debt rolled into a refinanced mortgage loan when the proceeds or personal debt was not used to buy, build, or substantially improve the home is not qualifying debt for the mortgage interest deduction. Scenario 2: Vacation Home. A vacation home is a home that may be used by you and is rented out at times during the year. If you use the vacation home without renting it out, you may deduct the mortgage interest and property taxes on Schedule A, subject to limits as described in Scenario 1. If you rent out your vacation home for less than 15 days during the year, you are not required to report the rental income on your tax return and you may still deduct the mortgage interest and real estate taxes on Schedule A. If you rent the vacation home out more than 14 days, but use it personally for the greater of 14 days or 10 percent of the number of days rented, it is considered a personal residence, and you may not deduct rental expenses greater than rental income. Mortgage interest and real estate taxes allocated to personal use are reported on Schedule A, subject to limitations. Mortgage interest, real estate taxes, and other deductible expenses (including depreciation) allocated to rental use are reported on Schedule E using the vacation home rules. Note that in cases when there is fractional ownership of a vacation home, a taxpayer must include the personal use of all co-owners of the vacation home in determining whether it is considered a personal residence. AFSA NEWS 62 JANUARY-FEBRUARY 2025 | THE FOREIGN SERVICE JOURNAL
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