A REQUEST FOR A CHANGE IN THE CAPITAL GAINS EXCLUSION ON THE SALE OF A PRINCIPAL RESIDENCE FOR THE UNIFORMED SERVICES AND THE FOREIGN SERVICE

July 14, 2003

THE PROBLEM. The many changes made in 1997 to the tax code by Public Law 105-34 were certainly welcomed. However, the new requirements for the exclusion of the capital gains tax with regard to the sale of one's principal residence, Sec. 313, has impacted negatively on many in this nation's Foreign Service and Uniformed Services. We respectfully request your assistance in modifying the law requiring a taxpayer to have lived in the principal residence for two of the previous five years from the date of sale in order to take advantage of the full capital gains exclusion on the sale of a principal residence.

The Problem In Terms of The Foreign Service

Many in the Foreign Service own a home in the U.S. while serving abroad. By law, they must have a U.S. home of record.

The typical tour is between two to four years, and several back-to-back tours abroad are common.

There are, of course, a multitude of reasons why a person may wish to sell soon after arriving home from an overseas tour -- an increase or a decrease in the size of the family; divorce; a change in the neighborhood, including the quality of the school pyramid, during the intervening years; the ability to afford more because of promotions and salary increases; and of course, separation from the Service either because of retirement or the Time-In-Class/Time-in-Service limitations.

Foreign Service employees who served two or more tours abroad, are effectively excluded from taking full advantage of the changes in the capital gains tax if they wish to sell their home upon their return to the United States, and thus would have to live in the home for two years to gain the full capital gains tax exclusion.

The Problem In Terms of the Uniformed Services

The Uniformed Services have similar tax problems resulting from the 1997 tax legislation. Like the Foreign Service, a condition of employment for the military is the requirement to move anywhere according to the needs of the service.

Also like the Foreign Service, it could be several tours encompassing many years before returning to their principal residence.

Thus as a matter of equity, the Uniformed Service, like the Foreign Service, requests an adjustment to the 1997 tax provisions because they too, are effectively excluded from taking full advantage of the changes in the capital gains tax if they wish to sell their home. They, too, would have to live in the home for two years to gain the full capital gains tax exclusion under current law.

AFSA AND UNIFORMED SERVICES REQUEST: AFSA and the Uniformed Services request that Sec. 313 of Public Law 105-34 be amended so that the five-year test period for ownership and use, be modified to accommodate the nature of careers in the Uniformed Service and the Foreign Service by extending the five-year "look back" period to cover time spent at posts away from the principal residence under orders of the government. Specifically, the five-year period ending on the date of the sale or exchange of a principal residence would not include any periods during which the taxpayer or the taxpayer's spouse was on qualified official extended duty as a member of the Uniformed Services or the Foreign Service of the United States.

THE FOREIGN SERVICE and OVERSEAS TOURS

1. Foreign Service personnel must be worldwide available as a condition of employment. If they refuse a foreign assignment, they can be fired.

2. Under the Foreign Service Act, Foreign Service personnel cannot serve more than
eight years domestically without a waiver from the Secretary of State. At the State Department, this limit is six years, unless extended by the Director General of the Foreign Service.

3. For many Foreign Service personnel, the needs of the Service require them to serve several consecutive tours abroad. Thus they could be abroad for nine years or more before returning to a Washington assignment.