Home Business and Selling Your Home


A

amyl

I develop software out of my home as a home based business. I have
only had my home since July of this year. From the research I have
done I can take a deduction (percentage) on my office/utilities which I
use only for my business. I also read that if you take this type of
deduction it introduces some tax issues when I will sell the home.

Can someone please explain the implications when selling a home that
has a business office in it? In general is it worth it?

Thanks
Amy.
 
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D

DORFMONT

If you claim a deduction for office in the home, you get to
deduct depreciation on the home at about .02564% times the %
of your home you use for an office. Let's say you use 10% of
your home for an office and the bldg. has a cost basis of
$200,000. Your depreciation deduction would be $200,000 x .1
x .02564 = $513/yr. This deduction would be worth about 14%
+ your marginal federal tax rate + your marginal state tax
rate each year in tax savings NOW. Saying that your federal
rate is 15% and your state rate is 6%, this savings would be
$180.

LATER when you sell the house you will have to recapture the
depreciation at a maximum of 25% tax rate or your marginal
rate which may still be at 15%.

I would rather save 35% of an amount NOW and pay 21 - 31% of
it LATER. This is why I always encourage my clients to claim
office in the home when they qualify.

Linda Dorfmont E.A., CFP, CSA
 
S

Seth Breidbart

wrote:
If you claim a deduction for office in the home, you get to
deduct depreciation on the home at about .02564% times the %
of your home you use for an office. Let's say you use 10% of
your home for an office and the bldg. has a cost basis of
$200,000. Your depreciation deduction would be $200,000 x .1
x .02564 = $513/yr. This deduction would be worth about 14%
+ your marginal federal tax rate + your marginal state tax
rate each year in tax savings NOW. Saying that your federal
rate is 15% and your state rate is 6%, this savings would be
$180.

LATER when you sell the house you will have to recapture the
depreciation at a maximum of 25% tax rate or your marginal
rate which may still be at 15%.

I would rather save 35% of an amount NOW and pay 21 - 31% of
it LATER. This is why I always encourage my clients to claim
office in the home when they qualify.
But if you have, say, a $200,000 gain when you sell the
house, you've changed $20,000 of that gain from excludable
to taxable.

Does the loophole (don't have a home office in the calendar
year before/of the sale) still work?

Seth
 
D

D. Stussy

If you claim a deduction for office in the home, you get to
deduct depreciation on the home at about .02564% times the %
^^^^^^^
3900 years! If only it would last so long. You're off by a
factor of 100.
of your home you use for an office. Let's say you use 10% of
your home for an office and the bldg. has a cost basis of
$200,000. Your depreciation deduction would be $200,000 x .1
x .02564 = $513/yr. This deduction would be worth about 14%
+ your marginal federal tax rate + your marginal state tax
rate each year in tax savings NOW. Saying that your federal
rate is 15% and your state rate is 6%, this savings would be
$180.

LATER when you sell the house you will have to recapture the
depreciation at a maximum of 25% tax rate or your marginal
rate which may still be at 15%.

I would rather save 35% of an amount NOW and pay 21 - 31% of
it LATER. This is why I always encourage my clients to claim
office in the home when they qualify.
Not only that, if you didn't claim it when you should have,
the IRS will recompute the sale as if you had.
 
P

Phoebe Roberts, EA

Seth said:
But if you have, say, a $200,000 gain when you sell the
house, you've changed $20,000 of that gain from excludable
to taxable.

Does the loophole (don't have a home office in the calendar
year before/of the sale) still work?
I vaguely recall a legislative fix which meant you no longer
have to disqualify the home office for 2 of the 5 years
before sale.

Phoebe :)
 
D

David Woods, EA, ChFC, CLU

If you claim a deduction for office in the home, you get to
But if you have, say, a $200,000 gain when you sell the
house, you've changed $20,000 of that gain from excludable
to taxable.

Does the loophole (don't have a home office in the calendar
year before/of the sale) still work?
The law was clarified two years ago. Only the depreciation
is taxed.
 
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S

Seth Breidbart

D. Stussy said:
(e-mail address removed) wrote:
Not only that, if you didn't claim it when you should have,
the IRS will recompute the sale as if you had.
How will the IRS know that you were eligible to claim a home
office? They can't tell whether a room was used exclusively
for business.

Seth
 
D

D. Stussy

Does the loophole (don't have a home office in the calendar
The law was clarified two years ago. Only the depreciation
is taxed.
Let's get really clear: Only the Post 5/7/1997 depreciation
is taxed. There may be home offices that have existed
before that date. :)

The one question that I haven't seen resolution to: IS
pre-May-'97 depreciation that was computed but not taken due
to IRC 280A limitations ignored on the sale, even if it is
the sale itself that it offsets when one goes through Form
8829? [Yes, ignore it, is the more favorable answer.]
 
D

D. Stussy

How will the IRS know that you were eligible to claim a home
office? They can't tell whether a room was used exclusively
for business.
In the case where one DOES claim expenses but not the
depreciation (IRC 280A limitation notwithstanding), then
they know. They also know if the wrong, not-limited amount
was claimed.

As to whether a home office qualifies at all, I agree that
they can't affirmatively know.
 
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D

David Woods, EA, ChFC, CLU

How will the IRS know that you were eligible to claim a home
office? They can't tell whether a room was used exclusively
for business.
What does that have to do with it? If you claimed a home
office deduction, you have to claim depreciation recapture.
If you didn't claim the home office, there was no
depreciation.
 

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