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Sale of a Residence with a Home Office

February 10, 2023

If you're planning to sell your home at a profit and "move up" to another one, you may be assuming that there won't be a tax to pay on the sale. Usually, that is a pretty good assumption because of the $250,000 exclusion of gain tax break on the sale of a principal residence (joint filers get a $500,000 exclusion).

However, if you use part of your home on your business and you have been claiming home office deductions for a number of years, you may not know about a potentially expensive tax trap that can hit you when the time comes to sell your home, i.e. you may have to pay "recapture" tax on the depreciation you have taken in the past.

If your home office is in your dwelling unit (not, for example in a detached garage or other separate building), the amount of depreciation you have deducted in the past as a home office expense is subject to tax.

However, if the "simplified" option has been used the for the entire time you have had the home office (this method became available in 2013), no depreciation needs to be factored in when you sell your residence. The simplified option allows a deduction of $5 per square foot for home office space, up to a maximum deduction of $1,500 for the year.

If your home office is not in the building in which you reside, you are treated as having sold two separate properties for purposes of using the home sale gain exclusion: a personal residence and a business building. The profit you realize on the sale of your home is entitled to the $250,000/$500,000 exclusion, but any profit you realize on the sale of the business part of your property is subject to tax.

For employees, the home office deduction is a miscellaneous itemized deduction subject to the 2 percent of gross income limitation. These deductions are temporarily repealed in years 2018 through 2025. Thus, the home office deduction is not available as an employee expense in these years.

Related newsletter;

Home office deduction

2021 Transaction Planning: Sale of Residence


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