To minimize net sale proceeds you would reduce from gross proceeds broker commission, legal, etc as per the HUD settlement statement to reduce the net gain as small as possible. Of course this should be attempted only with the guidance and expertise of a Certified Public Accountant (CPA).

Maintaining your Principal Residence while Abroad/ in the US:

If you decide to maintain your US or foreign residence while living abroad or while living in the US, the mortgage interest and real estate taxes are deductible in the year that they are paid on Schedule A of Form 1040. As US resident aliens- whether by US citizenship, US permanent residency (green card) or those persons that meet the Substantial Presence Test (SPT), your worldwide income is US taxable as is your worldwide deductions US deductible.

Renting it out:

Whether renting out a non US residence or a US residence, as a US resident alien worldwide taxability becomes a factor. Net rental activity is reported on IRS Form 1040- Schedule E. Schedule E supports inclusion of calendar year cash received rental income as well as a host of straight forward deductions, including: mortgage interest, real –estate taxes, cleaning, maintenance, repairs, commission, insurance, advertising, management fees, supplies, utilities, legal and professional, travel, and others such as snow removal, condo fees, etc.

Additionally depreciation is a mandatory US deduction, so claiming it is important. Failing to claim it results in you being deemed to have claimed it. For US located rental properties the depreciation rate is 27.5 years straight line, while for foreign properties the rate is 40 years straight line.

On sale there is a recapture of this prior claimed depreciation that in effect is retracted from the gain on sale exclusion calculation to form part of a fully taxable capital gain.

Further rental activity is considered a passive activity. Passive activity losses are only allowed to the extent of passive activity gains or income. Although there is a Special Allowance for rental real estate with active participation, for persons with adjusted gross income under $150,000 to a maximum special allowance of $25,000. Failing this the passive annual rental losses are suspended indefinitely and carried forward until such time as either the property or group of properties is sold or income drops below the $150,000 barrier, at which point the suspended losses are triggered.

There is a special election IRC Sec. 469(j)7) to treat the mortgage interest of a principal residence rented out as in effect by-passing the passive activity rules, therefore in effect triggering a rental loss to the extent of the mortgage interest annual claim. This mortgage interest would be termed Qualified Residence Interest. However these rules have been recently challenged and aggressively audited by the IRS ensuring that the home meets the Qualified Residence rules as delineated in IRC Sec. 121. Basically the home must be your main home where one may not have more than one main home at any time and the determination depends on the facts and circumstances of each case. However it stands that a rental that lasts for several years may indicate that the property is no longer a principal residence and, therefore may no longer qualify as Qualified Residence Interest eligible for the IRC Sec. 469(j)(7) election.

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