The Foreign Service Journal, February 2012

F E B R U A R Y 2 0 1 2 / F O R E I G N S E R V I C E J O U R N A L 35 nanced loan cannot be fully deducted the same year, but must be deducted over the life of the loan. It is advisable 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 in- cludes basic living accommodations, in- cluding sleeping, bathroomand cooking facilities. If the second home is a vaca- tion 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 prop- erty taxes and mortgage interest may be deducted. Rental of Home Taxpayers who rented out their homes in 2011 can continue to deduct mortgage interest as a rental expense. Also deductible are property manage- ment 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 Modified Adjusted Gross Income does not exceed $100,000 to $150,000 and the taxpayer is actively managing the prop- erty. Note that 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 Current tax laws allow an exclusion of up to $500,000 for couples filing jointly and up to $250,000 for single tax- payers on the long-term gain from the sale of their principal residence. One need not purchase another residence to claim this exclusion. All depreciation taken afterMay 7, 1997, will, however, be recaptured (added to income) at the time of sale, and taxed at 25 percent. Since 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 qualifi- cation for the capital-gains exclusion is that the house sold must 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 periodmay be extended by any period during which the taxpayer has been away from the area on a Foreign Service assignment, up to a maximum of 15 years (including the five years). There are some exceptions to the two- year occupancy requirement, including a sale due to a “change in place of em- A F S A N E W S