Resources:
- IRS Publication 587: Business Use of your Home
- IRS Publication 523: Selling Your Home
- IRS FAQ: Depreciation and Recapture
- 2013 Form 8829, Expenses for Business Use of Your Home
- Home Office Deduction
- Simplified Option for Home Office Deduction
Why YOU Should Care:
If you own your home and maintain a home office in that home, you may need to adjust your basis in your home when you sell and claim the previously deducted depreciation as gain. This impacts the amount of gain you can shield from tax.
Selling your Home (when your Home contains an Office)
When you sell your home, you may be able to exclude up to $250,000 of the gain on the sale from your taxable income ($500,000 if you are married filing jointly). See here for more info.
However, if your home contains a home office and you were allowed to deduct depreciation on Form 8829, you cannot exclude the portion of the gain equal to the amount of depreciation deducted (or allowed to be deducted). If you have adequate records showing that the depreciation you actually claimed on your home office was less than the full amount allowed, you are only required to exclude from gain the amount actually claimed.
For example: You sell your home in 2014 for $40,000 more than you purchased it for in 2009. This $40,000 gain is shielded from income if you meet the ownership and use tests.
However, if you maintained a home office in 2013 and claimed $700 of depreciation on your Form 8829 that year, this amount ($700) must be recognized as gain on the Schedule D you file with your 2014 income tax return. This means that the gain shielded from income has dropped from $40,000 in the previous paragraph to $39,300.
Note: The rules are different if your home was used to generate rental income.
Simplified Home Office Deduction
Starting in 2013, the IRS offered a simpler option to calculate the home office deduction. This method allowed taxpayers to use a rate of $5 per square foot (up to 300 square feet) to calculate the deduction rather than computing actual expense. With this method, depreciation is treated as zero. As such, there is no requirement to reduce the basis in your home when you sell.
We know this stuff can seem confusing – Let us know if we can help you!
