Today TaxMama hears from Ray, who tells us, “I just saw the article on deductions for a home office on WomensWallStreet.com. Something I learned last year from my tax advisor that needs to be disclosed is that when you sell your home, you get hit with Capital Gains tax on that home office location. In southern California, with unrealistic housing market price appreciation, that gain is monumental. We never knew how big a ding that home office would be come sale time. Our advisor strongly suggested not to have the home office deduction in order to be in a better tax position when we sell our home in the next few years. Just an observation that no one discloses with suggesting home office deductions.”
Dear Ray,
There’s a really good reason no one discloses this when suggesting office in home deductions.
That’s because that law was changed so long ago that only those professionals who don’t stay awake during their continuing education courses don’t know about it.
If you sell your home after May 6, 1997 you don’t need to worry about the monumental appreciation of your office in home percentage of the residence. All you need to track is the depreciation on your office in home. (IRC 121(d)(6) and Reg 1.121-1(d)(1).
Here’s the deal – you sell your home and are entitled to your full personal residence exclusion of $250,000 or $500,000 – if you lived in for the last 2 years, or 2 years out of the last 5.
You pay capital gains taxes on anything over that gain.
But, the depreciation you’ve taken, or should have taken, gets taxed at your highest tax rate or 25%, whichever is lower. You’ll report this on Schedule D.
https://www.irs.gov/pub/irs-pdf/f1040sd.pdf
Use the worksheet on page D-8 of the instructions. Then take the total to line 25 of the worksheet on page 9. https://www.irs.gov/pub/irs-pdf/i1040sd.pdf
IRS Publication 523 has a section on selling your residence when it was used partly for business or rental. It may help you, when you see IRS lay out the details. They have some excellent examples with the costs split between personal and business (actually rental, but it’s the same idea.) https://www.irs.gov/publications/p523/ar02.html#d0e3597
And, remember, you’ll find answers to questions about all kinds of tax issues, free. Where? Where else? At TaxMama.com
[Note: His tax advisor is not representative of most professionals I see.]- Ask TaxMama :: Where taxes are fun and answers are free
- IRS Schedule D :: Use L ine 19 to report the depreciation
- IRS Schedule D Instructions :: Use worksheets on pages 8 & 9
- IRS Publication 523 :: Section on sale of home with office in home or rental
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