The Foreign Service Journal, February 2008

F E B R U A R Y 2 0 0 8 / F OR E I GN S E R V I C E J OU R N A L 47 such as borrowing money to buy tax- exempt securities, is not deductible. Home Leave Expenses Employee business expenses, such as home leave andrepresentation,maybe list- edasmiscellaneousitemizeddeductionsand claimed on Form2106. In addition to the 2-percent floor, only 50 percent for meals andentertainmentmaybeclaimed(100per- cent for unreimbursed travel and lodging). Only the employee’s (not familymembers’) home leave expenses aredeductible. AFSA recommends maintaining a travel log and retainingacopyofhomeleaveorders,which will help if the IRS ever questions claimed expenses. It is important to save receipts: without receipts for food, a taxpayer may deduct only $39 to $64 a day (depending upon the federalmeals-and-incidentals per diem rate at the home leave address), no matter how large the grocery or restaurant bill. Lodging is deductible, as long as it is notwith friendsor relatives, or inone’sown home. The IRSwill disallowuseofperdiem rates and any expenses claimed for family members. If a hotel bill indicates double rates, the single-room rate should be claimed;and,ifpossible,thehotel’sratesheet shouldbe saved for IRSscrutiny. Car rental, mileage and other unreimbursed travel expenses, including parking fees and tolls, may be deducted. The rate for business miles driven is 48.5 cents per mile. Those whouse thisoptionalmileagemethodneed not keep detailed records of actual vehicle expenses. However, they must keep a detailedodometer log to justify thebusiness use of the vehicle and track the percentage of business use. This optional mileage method applies to leased vehicles as well. Official Residence Expenses Since Oct. 1, 1990, employees who receive official residence expenses havenot been allowed to reduce their reportable income by 3.5 percent. The IRS ruling regardingOREstates that “usual expenses,” defined as 3.5 percent of salary, are not deductible. Thereforetheonlyexpensesthat are deductible are those above the 3.5 per- cent paid out of pocket. Employees should save receipts for any out-of-pocket expenses associated with their representational duties. These expensescanbedeductedasmis- cellaneous business expenses. Home Ownership Individualsmaydeductinter- est onup to$1millionof acqui- sition debt for loans secured by a first and/or secondhome. This also includes loans takenout for major home improvements. On home equity loans, interest is deductible onup to$100,000, nomatter howmuch the home cost, unless the loan is used for home improvements. The $100,000 ceiling applies to the total of all home equity loans youmay have. The same generally applies to refinancing a mortgage. Points paid to obtain a refinanced loan cannot be fully deductedthesameyear,butmustbededuct- ed over the life of the loan. It is advisable to save the settlement sheet (HUD-1 Form) fordocumentation inthe event your tax return is selected by the IRS for audit. Qualified residences are defined as the taxpayer’sprincipal residenceandoneother residence. Thesecondhomecanbeahouse, condo, co-op,mobilehomeorboat, as long as the structure includesbasic livingaccom- modations, including sleeping, bathroom and cooking facilities. If the second home is a vacationproperty that you rent out for fewer than 15 days during the year, the income need not be reported. Rental expenses cannot be claimed either, but all property taxes and mortgage interest may be deducted. Rental of Home Taxpayers who are overseas and rent- ed their homes in 2007 can continue to deductmortgage interest as a rental expense. Alsodeductible are propertymanagement fees,condofees,depreciationcosts,taxesand all other rental expenses. Losses up to $25,000maybeoffset against other income, as long as the AGI does not exceed $100,000 and the taxpayer is activelyman- aging the property. However, a taxpayer who retains a property manager does not lose this benefit. All passive losses that can- not bedeductedcur- rentlyare carried for- ward, and deducted in the year the prop- erty is sold. Sale of a Principal Residence The current cap- ital-gains exclusion on the sale of a prin- cipal residence onor after May 7, 1997, applies to all home- owners regardless of their age. Previously, qualified individuals who were age 55 or older were allowed a one-timecapital-gainsexclusionof$125,000. Also, under previous law, if youhad a gain whenyou soldyour home, youcoulddefer all or part of the gain if you purchased or built another home (of equal or higher value) within two years before or after the sale. The current tax laws allowan exclusion of up to $500,000 for couples filing joint- ly and up to $250,000 for single taxpayers on the long-termgain fromthe saleof their principal residence. Oneneednot purchase another residence to claim this exclusion. All depreciation taken after May 7, 1997, will, however, be recaptured (added to income) at the time of sale, and taxed at 25 percent. The only qualification for the capital- gains exclusion is that the house soldmust havebeen the taxpayer’sprincipal residence, owned and occupied by the taxpayer for at least twoof the last five years prior to the date of the sale. As stated above, the five- year periodmay be extendedbasedon any periodduringwhich the taxpayer has been away from the area on a Foreign Service assignment, to a maximum of 15 years (including the five years). There are some exceptions to the two-year requirement, including a sale due to a “change in place of employment” (this would include for- eign transfers). This exclusion is not lim- ited to a once-in-a-lifetime sale, but may be taken once every two years. Whenaprincipal residence is sold, cap- ital gains realized above the exclusion A F S A N E W S JOSH