The Foreign Service Journal, January 2003

not return to the “new” residence in the U.S. until 2001. Eighteen months after resuming residence in the “new” residence, you sold it at a gain. You can exclude the gain from taxa- tion under the current requirement to have lived in the “new” residence for two out of the five years preceding the date of sale by counting both the nine months of residence in the prior home and the one-and-a-half years of residence in the “new” home. One final note on the home sale gain exclusion: taxpayers who rented out their homes or used them for business purposes, claimed deprecia- tion, and then resumed using the houses as residential property prior to sale cannot exclude the part of their gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. All of that gain will be taxable in the year of the sale of the property (consult Publication 523 for details). You cannot postpone the tax bite of this requirement, moreover, by engag- ing in an installment sale because the full amount of the gain equal to the depreciation previously taken (or the amount of depreciation that should have been taken, if you did not claim it) must be reported as income in the year of the installment sale. If you sell a property on which you claimed depreciation while using it for business (including residential rentals), and will therefore be subject to tax on the gain equivalent to depre- ciation claimed after May 6, 1997, be sure to either increase the amount of taxes withheld from your salary, or make an estimated tax payment prior to the due date for transactions occur- ring on the date of sale. Uncle Sam wants his money sooner, rather than later, after such a sale, not by April 15 of the following year. Waiting until April 15 to settle up will result in penalties and interest on the unpaid taxes, assuming you do not have other credits or tax payments to offset them. If you are unsure about whether the examples provided in Pub. 523 apply to your individual situation, you should consult a tax preparer, CPA, tax attorney or other qualified profes- sional. If done properly, the exclusion can save you many thousands of dol- lars in taxes. Edward Michal was an FSO from 1975 until 2002, serving in Monterrey, Santiago, Maseru, Kolonia, Port Moresby, Tegucigalpa and Washing- ton, D.C. He currently resides in Dripping Springs, Texas. He will pre- pare tax returns during the 2003 tax season. 20 F O R E I G N S E R V I C E J O U R N A L / J A N U A R Y 2 0 0 3 F S F I N A N C E S