The Foreign Service Journal, February 2009

F E B R U A R Y 2 0 0 9 / F O R E I G N S E R V I C E J O U R N A L 45 secured by a first and/or second home. This also includes loans taken out for major home improvements. On home eq- uity loans, interest is deductible on up to $100,000, no matter how much the home cost, unless the loan is used for home im- provements. The $100,000 ceiling applies to the total of all home equity loans you may have. The same generally applies to refinancing amortgage. Points paid to ob- tain a refinanced loan cannot be fully de- ducted the same year, but must be de- ducted over the life of the loan. It is advis- able to save the settlement sheet (HUD-1 Form) for documentation in the event your tax return is selected by the IRS for audit. Qualified residences are defined as the taxpayer’s principal residence and one other residence. The second home can be a house, condo, co-op, mobile home or boat, as long as the structure includes basic living accommodations, including sleep- ing, bathroomand cooking facilities. If the second home is a vacation property 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 inter- est may be deducted. Rental of Home Taxpayers who are overseas and rented their homes in 2008 can continue to deduct mortgage interest as a rental ex- pense. Also deductible are property man- agement fees, condo fees, depreciation costs, taxes and all other rental expenses. Losses up to $25,000 may be offset against other income, as long as the Adjusted Gross Income does not exceed $100,000 to $150,000 and the taxpayer is activelyman- aging the property. Note: A taxpayer who retains a property manager does not lose this benefit, as this is still considered active management of the property. All passive losses that cannot be deducted currently are carried forward, and deducted in the year the property is sold. Sale of a Principal Residence The current capital-gains exclusion on the sale of a principal residence on or after May 7, 1997, applies to all homeowners re- gardless of their age. Previously, qualified individuals who were age 55 or older were allowed a one-time capital-gains exclusion of $125,000. Also, under previous law, if you had a gain when you sold your home, you could defer 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. These last two provisions no longer apply. The current tax laws allow an exclusion of up to $500,000 for couples filing jointly and up to $250,000 for single taxpayers on the long-term gain from the sale of their principal residence. One need not pur- chase another residence to claim this ex- clusion. All depreciation taken afterMay 7, 1997, will, however, be recaptured (added to income) at the time of sale, and taxed at 25 percent. Readers should also be aware that start- ing in January 2009, gain from the sale of a home will no longer be excluded from gross income for periods when it was rented out before you occupied it as a prin- cipal residence. Further details will be in- cluded in the 2009 Tax Guide. A F S A N E W S