Today TaxMama hears from Jon in Colorado, who’s been listening to friends. “My wife and I have a small business that we operate from our house in the country. We moved here eight years ago because it had a large detached four-car garage (1,100 SF), which we use as our studio. We also use two other rooms in the house, one as an office and one as a smaller studio and business storage. We have now put the house up for sale. We were told that when we sell this place, we’ll have to pay tax on the portion of the buildings that we have claimed for business purposes. Is this right? “

Hi Jon

Well, that was true – once upon a time. Now, it’s only partly true.

When you sell your home, you and your wife will be able to avoid paying taxes on $500,000 worth of profit.

What you will pay tax on is the depreciation you’ve taken on the house and garage since you started the business. Or the depreciation you should have taken, if the numbers were computed incorrectly. (There’s a fix for that, if there were errors, so don’t worry.)

I don’t know how much your house cost, or how much depreciation you took. But at 2.564% of $100,000×8 years – the total depreciation comes out to a little over $20,000. The taxes on that are maximum 25% for IRS and whatever AZ charges at your income level. Say 35% total. Worse case, it will cost you about $7,000 if your depreciable property was $100K. Less, if it was less.

So, you needn’t lose sleep over that.

You can read the details here in this part of IRS Publication 523.

And remember, you’ll find answers to lots of questions about selling your office in home and other tax information, free. Where? At TaxMama.com

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