Wednesday, August 8, 2007


Here is a quick tip for those of you who sell a personal residence in which you had a home office.

If you sell a personal residence of which part was used as a deductible home office you no longer have to pay tax on the percentage of the gain that represents the home office use (i.e. 10% of the property used as a deductible home office – 10% of the net gain on the sale of the property taxed). You can apply the $250,000 and $500,000 exclusion amounts to 100% of the gain, if you qualify, regardless of any business use.

However, according to IRS Publication 523 (Selling Your Home), “If you were entitled to take depreciation deductions because you used your home for business purposes…you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997.”

But when determining the amount of depreciation to recapture you can forget all about the rule of “allowed or allowable”. You only need to recapture (i.e. claim as capital gain income) depreciation actually deducted (i.e. for which you received a tax benefit). Publication 523 states, “If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, the amount you cannot exclude is the amount allowed.”
If a home office deduction carry forward contains depreciation, and the property is sold, the depreciation portion goes away. And while I am on the subject of home office, be advised that only acquisition debt can be deducted on a home office – not home equity (unless the equity debt was used to repair or improve the home in general or the home office in particular).
If $200,000 of the principal on a mortgage represents true “acquisition debt” and $50,000 was used to pay down non-business credit card debt you can only deduct the interest on the $200,000 acquisition debt on Form 8829.
This is similar to the rules for deducting mortgage interest on a rental property and in calculating the dreaded Alternative Minimum Tax (AMT) discussed in my “So What Do I Think” post.
Any questions?


Will said...

For people with schedule C income, is it wise to deduct home office expenses on Schedule C?

I was thinking about paying a portion of my rent with a seperate check and documenting it as a business expense. Doing this might put me in a loss for this year though... would it be a mistake?


Robert D Flach said...


I will answer your questions in tomorrow's THE WANDERING TAX PRO posting.