The Foreign Service Journal, February 2010

F E B R U A R Y 2 0 1 0 / F O R E I G N S E R V I C E J O U R N A L 61 Losses of up to $25,000 may be offset against other income, as long as the tax- payer is actively managing the property. That amount phases out to zero between $100,000 and $150,000 of Adjusted Gross Income. Note: A taxpayer who retains a property manager does not lose this ben- efit, as this is still considered active man- agement of the property. All passive losses that cannot be deducted currently are car- ried forward, and deducted in the year the property is sold. Sale of a Principal Residence 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 after May 7, 1997, will, however, be recaptured (added to income) at the time of sale, and taxed at 25 percent. However, as we note under “New for 2009” on the front page of the Tax Guide, after January 2009, gain from the sale of a home can no longer be excluded from gross income for periods when it was rented out before you occupied it as a principal residence. The only qualifica- tion for the capital-gains exclusion is that the house soldmust have been owned and occupied by the taxpayer as his or her principal residence for at least two of the last five years prior to the date of the sale. For the Foreign Service, the five-year pe- riodmay be extended based on any period during which the taxpayer has been away from the area on a Foreign Service assign- ment, up to a maximum of 15 years (in- cluding the five years). There are some exceptions to the two-year occupancy re- quirement, including a sale due to a “change in place of employment” (this would include foreign transfers). This ex- clusion is not limited to a once-in-a- lifetime sale, but may be taken once every two years. When a principal residence is sold, capital gains realized above the exclusion amounts are subject to taxation. This ex- clusion replaces the earlier tax-law provi- sion that allowed both the deferral of gain and a one-time exclusion of a principal residence sale. Temporary rental of the home does not disqualify one from claiming the ex- clusion. The new tax law requires only that you have occupied the house as your principal residence for the required period (two years out of five, extended). Now, however, the new 2009 legislation requires that the“two years out of five (extended)” cannot start until the date the home is oc- cupied as a principal residence for the first time. Under Internal Revenue Code Section 1031, taxpayers whose U.S. home may no longer qualify for the principal residence exclusion may be eligible to replace the property through a “tax-free exchange” (the so-called Starker Exchange). In essence, one property being rented out may be exchanged for another, as long as that one is also rented. In exchanging the properties, capital gains tax may be de- ferred. Technically, a simultaneous trade A F S A N E W S