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The Home Office Deduction: What happens when you sell your home?

The home office deduction is one of those deductions people often tout as an advantage of having your own business. But one of the disadvantages of taking the home office deduction people don't really talk about is its effects when you finally sell your house.

Say you work from your home and over the course of several years you took the home office deduction including $5,000 in depreciation expense on the portion of the house used in business. When you sell that home, the depreciation you took in prior years is not excludable. In fact, you have taxable gain of $5,000. And not a long-term capital gain. It's a called Unrecaptured Section 1250 Gain. You report this on Schedule D, Line 19. This amount then gets transferred to the utterly confusing Schedule D Tax Worksheet.

If you can wade through the worksheet, you'll find that this gain is taxed at a flat 25%. This means that the depreciation deduction you take for your home office today is really just a deferral of taxes to future years.

Add to this the fact that the home office deduction is a red flag for IRS audits and your mortgage interest and property taxes are already deductible. That's why if there's any question as to your elibigility for taking the deduction, don't. When you get down to really crunching the numbers, the actual monetary benefit is rarely outweighs the hassle.

For more information on this see IRS Publications 523, Selling your Home and 587, Business Use of Your Home along with the Instructions for Schedule D.

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It is absolutely worth

It is absolutely worth it!

"…this gain is taxed at a flat 25%"
This is true only if your capital gains on the sale of your home are over $250,000 ($500,000 for a joint return).

"…your mortgage interest and property taxes are already deductible"
Yes, however, more is deductable for the business because it lowers your self employment tax on schedule SE.

If you have a real home-based business it is absolutely worth the "hassle" to keep more of your money from the blood sucking socialist in Washington!

have never thought about it

have never thought about it that way. selling a home is an important business and one should be really careful about it. thanks for sharing this. such articles are really necessary to inform people about all the possibilities of such operations

I agree entirely - you don't

I agree entirely - you don't think about the complexities of trading in your house until you've got to do it. It's a huge deal!

deduction

I bet those that took the deductions are finding it extra hard to sell their houses in this market..

If you can wade through the

If you can wade through the worksheet, you'll find that this gain is taxed at a flat 25%. This means that the depreciation deduction you take for your home office today is really just a deferral of taxes to future years. - very helpful

What if your business moves out of the office for 2 years?

My understanding of renting a *house* (like a vacation home) is that if, after depreciating it for years, you then move the business out for 2 years (turning the office room back into part of your primary residence) that you don't have to recapture(I think that's the word) that depreciation.

Am I mistaken?

Depreciation Recapture when selling your house w/home office

Sorry, yes you're mistaken. I think you may be confusing the recent guidance on converting business property to a principal residence in regard to 1031 exchanges.

You will need to recapture your depreciation when you eventually sell your home.

Since you have an corporation, the easiest way to handle a home office is to have corporation reimburse you for your actual expenses. You don't get to advantage of depreciation, but you don't have to deal with the recapture either.

L:)

Please clarify

I was reading your blog on "The Home Office Deduction: What happens when you sell your house", and you mentioned that it isn't a good idea to take the home office deduction because the of the unrecaptured gain. And then you mentioned in a later reply it's easier to handle home office as a corporation reminbursement for expenses. I have 2 questions: what is the difference in a home office deduction vs. corporation reimbursment for the expenses? And the expenses you've mention include utility (electric), mortgage, phone, etc?

Followup: my C-Corp is renting the room in the basement

I forgot to clarify:

We are depreciating the office room and counting that against rental income that our C-Corp pays.

Thanks

I have searched the net and I should say I have not come across an article like this which is so easy to understand and learn the concepts.

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