The Foreign Service Journal - January/February 2017
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see Military Families Relief Act below); (ii) cannot have acquired

the home in a 1031 exchange within the five years before the

date of the sale; and (iii) cannot have claimed this exclusion

during the two years before the date of the sale. An exclusion of

gain for a fraction of these upper limits may be possible if one

or more of the above requirements are not met. A taxpayer who

sells their principal residence for a profit of more than $250,000

($500,000 married filing jointly), or a reduced amount, will owe

capital gains tax on the excess.

(4)(b) Military Families Tax Relief Act of 2003:

The five-

year period described above may be suspended for members

of the Foreign Service by any 10-year period during which the

taxpayer has been away from the area on a Foreign Service

assignment, up to a maximum of 15 total years. Failure to meet

all of the requirements for this tax benefit (points (i) through

(iii) in the Selling a Principal Residence section above) does not

necessarily disqualify the taxpayer from claiming the exclusion.

However, the services of a tax professional will probably be

necessary if one of these requirements is not met.

(4)(c) Adjustments to the Basis of a Home:


Buying or Building a Home:

Some investments in the con-

struction of a home, purchase of a home, improvements during

ownership and improvements in preparation to sell must be

added to the basis of the home. The starting point is the amount

paid to acquire the property: cost basis. Some settlement fees

and closing costs may be added to the cost basis (yielding the

adjusted basis). These include abstract of title fees, charges

for installing utility services, legal fees for the title search and

preparing the sales contract and deed, recording fees, survey

fees, transfer or stamp taxes and title insurance. A taxpayer

who builds a home may add the cost of the land and the cost to

complete the house to arrive at an initial cost basis. Construc-

tion includes the cost of labor and materials, amounts paid to

a contractor, architect’s fees, building permit charges, utility

meter charges and legal fees directly connected with building

the house.


Improving a Home During Ownership:

During the owner-

ship period, improvements to the home including additions

(bedrooms, bathrooms, decks), lawn and grounds improve-

ments (landscaping, paving a driveway), improvements to the

exterior (stormwindows, new roof, siding), insulation, plumbing,

interior improvements (built-in appliances, kitchen modifica-

tions, flooring) and investments in the home systems (heating,

central air, furnace) may all be added to adjust the basis of the

home upward.


Preparing to Sell:

“Fixing-up costs” no longer exist insofar

as they refer to what was once recognized as a 1034 exchange

of a residence. Capital expenditures continue to operate as

described above when a taxpayer is preparing to sell a home.

Any capital improvements when preparing to sell should simply

be added to the adjusted basis and subtracted from the sales

price to reduce net capital gain when the home is sold.



Selling expenses can be subtracted from the

sales price, further reducing the taxable gain. These include fees

for sales commissions, any service that helped the taxpayer sell

the home without a broker, advertising, legal help, and mortgage

points or other loan charges the seller pays that would normally

have been the buyer’s responsibility.

C i r c u l a r 230 No t i c e :

Pursuant to U.S. Treasury Department Regulations, all state

and federal tax advice herein is not intended or written to be

used, and may not be used, for the purposes of avoiding tax-

related penalties under the Internal Revenue Code or promoting,

marketing or recommending advice on any tax-related matters

addressed herein.



In 2014, the State Department instituted new procedures to comply with Treasury regulations for withholding state taxes for

all employees serving domestically. (See Department Notice 2014_11_016, dated Nov. 3, 2014.) This means state taxes will be

withheld for an employee’s “regular place of duty”—in other words, your official duty station. If you require state taxes to be

withheld for a state other than that of your official duty station, your bureau executive director must provide a certification to

the department’s Bureau of the Comptroller and Global Financial Services.

This does not mean that you must relinquish your state of domicile if it is different than your official duty station. “Domi-

cile” (legal residence) is different from“residence,” and so long as you maintain your ties to your home state you will be able

to change your withholdings, if you so wish, back to your home state when you go overseas again. See the Overseas Briefing

Center’s guide to Residence and Domicile, available on AFSA’s website at

Bear in mind, too, that CGFS does not adjudicate state income tax elections when you are serving overseas, since in those

circumstances it is the employee’s responsibility to accurately elect state income taxes. However, upon the employee’s

return to a domestic assignment, CGFS will evaluate the employee’s state tax withholding election based on his or her new

official domestic duty station.