The Foreign Service Journal, May 2004

8 AFSA NEWS • MAY 2004 HOME SALES & CAPITAL GAINS New Law Offers Tax Breaks for FS Homesellers BY JAMES YORKE, LABOR MANAGEMENT SPECIALIST T he Military Family Tax Relief Act, signed into law on Nov. 11, 2003, contains the long-awaitedprovision that assistsmilitaryandForeignServiceper- sonnel who sell their principal residence. The provisions are complex, and a careful reading of the regulations and your own situation are required. Under a law enacted in 1997, you had to live in your house for two years out of the last five inorder to exclude gainon the sale of the residence, and thus avoid pay- ing capital gains tax. The new law allows you to extend this five-year period for up to 10 years of extendedduty overseas or at a domestic location that is more than 50 miles from the residence that you are sell- ing. Inotherwords, youmust haveowned and lived in the house for two years out of the last 15, ofwhichnomore than10 years canbedisregarded for absence at aduty sta- tion overseas or more than 50miles away (see examples below). This, inanutshell,means that if youare thinking of selling your house now, you must have owned and used it as a home for any two years in total since 1989. The periodsmaking up the two years neednot be consecutive or contiguous. For any five of the15years since1989youcanhavebeen anywhere, so long as two years were spent in the house. For the other 10 years, you must have been overseas or more than 50 miles away on Foreign Service orders. If you sold the house on or after May 7, 1997, however, you would have had to have owned the house and used it as a home for any two years sinceMay 7, 1982, withany fiveof the15years since1982 spent anywhere, so long as two years were spent in the house. For any 10 years, you must have been overseas ormore than 50miles away on Foreign Service orders. Two very important points about this new law: 1. The change applies to home sales afterMay 6, 1997, so the 15 yearsmust go back from no earlier than that date. Normally, anamendedreturnmust be filed within three years of the original return’s due date, but the new law gives qualifying taxpayers who sold a home betweenMay 6, 1997 and Jan. 1, 2001, until Nov. 10, 2004, to file anamendedreturn. (The gains on a house sold in 2001 would have been reportedon the 2001 tax return, dueApril 15, 2002, so the amended returnwouldbe due by April 15, 2005.) 2. If you qualify for a refund of capi- tal gains tax, you must file an amended 1040, with thewords “Military FamilyTax Relief Act” in red at the top. If you need a copy of an earlier year’s return, youmay use Form 4506, “Request for Copy or Transcript of Return.” The IRShas provided examples tohelp taxpayers understand the new home sale exclusion rule: Example #1: Mr. Green owned a house in Georgia and lived there from December 1988 until deployed overseas in January 1991. When he returned to the U.S. in July 1999, he was stationed 90 miles from the house. Preferring not to commute this distance, he sold the house four months later, realizing a gain of $150,000. Because he had not used the house as his principal residence during the five years preceding the sale, he report- ed this capital gain on his 1999 return. Under the new law, he can disregard both the 8.5 years he was overseas and the four months after his return to the States, since he was stationedmore than 50miles from old residence. His five-year test period for ownership and use now consists of the five years before January 1991, when he went overseas. Since he owned and lived in the house formore than two years dur- ing this test period, he may exclude the gain on the sale. He must file an amended return by Nov. 10, 2004, to recover the capital gain tax paid on the 1999 return. Example#2: Assume the same facts as Example #1, except that whenMr. Green returned to theU.S., his duty stationwas 40miles fromthe house.Only the timeoverseas may be disregarded, because his duty station after return- ing to the U.S. was within 50 miles of theold residence. He can still claim the exclusion, and must file an amended return by Nov. 10, 2004, to recover the capital gain tax paid on the 1999 return. Example #3: Col. White owned and lived inherOhio house for three years beforebeing stationed overseas inJanuary1988. Shewas still over- seas when she sold the house in January 2003. Shemay disregardonly 10 of her 15 yearsoverseas, soher 5-year test periodcon- sists entirely of years in which she did not live in thehouse, leavingher not eligible for the home sale exclusion. Clearly, Foreign Service members will have individual circumstances that differ indetail fromthese examples. If youhave any questions or need advice, please con- tactAFSA. Incidentally, someAFSAmem- bers have already claimed this rebate suc- cessfully. ▫ If you qualify for a refund of capital gains tax, you must file an amended 1040, with the words “Military Family Tax Relief Act” in red at the top. JOSH