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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
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
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-
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-