Did you leave behind a home in the States when you moved to Singapore? If so, you're not alone! I don't have exact statistics, but I would bet that if you polled the American expat community you would find that 1 out of every 3 people still own the home that they were living in prior to taking on their overseas assignment.
This article will explore the options individuals have in connection with what was once their primary home and the tax consequences of those choices.
Basically there are three things you can do with the home you were living in before your move: sell it, rent it or leave it vacant.
Let's take the first option: selling it. I'm sure many of you remember the time when, if you sold your principal residence, you had to purchase another one of equal or greater value in order to defer paying tax on the gain. Well those days ended in 1997 when Congress changed the rules to say that individuals could exclude gain of up to $250,000 ($500,000 if you were married) if they sold property that was their primary residence and that they owned and lived in for at least two out of the five years leading up to the date of the sale (these are called the “ownership and use tests”). A reduced exclusion is available if the ownership and use tests were not met due to a change in employment. For example if you only owned and lived in the house for one year prior to moving to Singapore then you would be entitled to exclude one-half of the exclusion ($125,000 for a single individual or $250,000 for a married couple).
The second option would be to rent it. Under this option you would be required to report the rental income you received but you would also be able to take deductions against the income for items such as mortgage interest, real estate taxes, repairs, insurance, managing agent fees, advertising, cleaning and maintenance, travel expenses and depreciation. This last item, depreciation, is an important one to note because it reduces your basis in the home. Thus, if and when you sell it, your gain will be that much higher. Furthermore, if you sell the home while you meet the 2 out of 5 year ownership and use tests, the portion of the gain which resulted from your having taken depreciation does not qualify for the exclusion.
Example: On May 1, 2001 Robert moved into a house that he owned and had leased to tenants since May 1, 1999. Robert took depreciation deductions totaling $12,000 during the period that he leased the property. After occupying the residence for 2 years, Robert sold the property on June 1, 2003, realizing a gain of $50,000. Only $38,000 of the gain may be excluded ($50,000 gain realized less $12,000 of depreciation deductions).
Regardless of this hitch, renting your home while you are on assignment overseas is still a popular option. As you saw, doing so does not preclude you from excluding a portion of any gain you might realize upon selling the home if you meet the ownership and use tests. And you can meet the tests stipulations by either living in the home for two years once you return from your assignment or by selling it within three years from the date that you went on assignment.
The final option is to leave the house vacant and perhaps use it when you return for home leave trips. I've found this to be a common choice either a) when the individual has owned the home for some time b) the home has been in the family for more than one generation or c) the individual anticipates that he/she will return to the home after his/her assignment and is not interested in having strangers living in the house while he/she is away.
Under this option you would still continue to be able to take an itemized deduction for mortgage interest and real estate taxes (as you would have taken on your returns prior to moving overseas). However, you would not be entitled to the same deductible expenses as you would if you chose to rent. In addition, if you are no longer required to file a state tax return, your itemized deductions might be lower than your standard deduction. In that case you would take the higher standard deduction and, effectively, lose out on the mortgage interest and real estate tax deductions.
Example: Joe and Mary moved to Singapore from New York on January 1, 2003. On their federal tax return for 2002 they had the following itemized deductions: mortgage interest - $5,000, real estate taxes - $2,000 and New York State and City taxes of $5,000 – a total of $12,000 in itemized deductions. That year the standard deduction for a married couple filing jointly was $7,850 and so Mary and Joe took the higher itemized deduction amount of $12,000 in arriving at their taxable income.
For 2003 Joe and Mary incurred the same amounts for mortgage interest and real estate taxes ($7,000) but as they were not required to file a New State tax return, and as the standard deduction for a married couple filing jointly in 2003 was $9,500, Mary and Joe took the higher standard deduction. In effect, they did not actually get any deduction for the mortgage interest and real estate taxes for which they had paid.