Tomorrow is tax day (and, coincidentally, the anniversary of the Titanic sinking). I wanted to pass along this tip that could save you up to $75,000 in taxes that I’m surprised more people don’t know.

For those of you who actually know me, you’ll remember that I was conducting real estate settlements in DC before joining the Foreign Service.  I liked learning the intricacies of real estate law but one thing stuck out at me: active duty military and Foreign Service Officers have a much longer window to sell a house and claim up to $500,000exemption on the capital gains from the home sale. Most people know about the 2 years in 5 rule, by which you can exempt your primary home from capital gains if you lived in it for two out of the five years before you sold it. The exemption is $250k for individual filers and $500k for married couples filing jointly. The special rule for FSOs is that you can suspend your five-year test period for up to 10 years if you’re on assignment away from your home — effectively giving you a 2 year in 15 rule!

For example: say I bought an apartment in DC for $200,000 in January 2001 and lived in it as my main home through July 2004 when I was posted overseas. In the five years since then, say I’ve acquired several children, rugs, and large non-embassy furniture and I need a bigger place. In this fantasy equation, I sell the house for $500,000. Your real estate agent and possibly even your tax preparer may think you’re on the hook for $300k in gains on the house ($45,000 tax liability) because you fail the 2 in 5 tests. Au contraire! The example STILL works if I had lived in the house from 1996-1999 and have been overseas since (the publication actually doesn’t make the distinction that you have to be overseas though it does for members of the intelligence community. I’d rather not have my readers be tests cases, but you could always check with a lawyer to see if it applies while you’re domestic).

The full rules for this are explained in IRS Publication 523. If you’re not sure, talk to a tax professional or a lawyer. Another option that requires much more foresight than the previous example would be a “Starker” 1031 exchange, which I can get into at a different time.  It’s useful, though, to point this out to real estate folks in DC because most of them are shocked to know it and wouldn’t be in a position to even advise you on it (though I think I remember the excellent Benny Kass mentions it in one of his WaPo columns.

Commenter joeking asks about scanning in documents to document home leave expenses for purposes of the tax deduction. I have no personal experience doing this, as I have not met the 2% floor due to staying in a home I own during home leave.

As I see it, there are two questions being asked here. The implied question is, “what’s the best way to save records for tax purposes.” Without question or hesitation, I’m telling you SCAN, SCAN, SCAN. I see no need to get a purpose-built scanner and am happy with my Canon LIDE lightweight scanner. There’s also the super-tiny NeatReceipts. The good news is that the IRS accepts scanned copies [see: Rev. Proc 97-22] for NEARLY ALL RECORDS. Seriously, quit lugging around paper copies of all that junk.

The second question is about actually deducting home leave. I’m no tax professional, and I recommend reading AFSA’s Tax Guide, but here’s my two cents: unless you both own a home and are travelling extensively on your home leave, you might not be deducting much. First, this only works if you’re not using the Standard Deduction. You must itemize using Schedule A to claim business expenses. If you don’t own a home or make large charity donations (outside of CFC), you’re likely of luck. Second, you can only claim yourself, not/not your family. So, if you’re staying in two double hotel rooms, you can only deduct one single-occupancy rate. Finally, you can avoid saving food receipts and driving receipts if the cost is under the IRS rates of per diem and $.485/mi, respectively. Food can only be deducted at 50% of actual expense. If you’re staying with family or friends, you can’t claim those expenses. See IRS Form 2106 for the full info.

Remember, certain other costs can be claimed as business expenses. These include ORE, AFSA membership costs [I'm not a member], some subscriptions, etc. I haven’t run up a tab large enough to deduct over the 2% floor for miscelaneous expenses. That said, it doesn’t hurt to scan something and figure it out at tax time.