Sale of a Residence with a Home Office

As someone who sees clients in an office located in your home, you're certainly aware of the tax breaks available for such usage. Although 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.

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's 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, this tax break works only with a property that's 100% a home. Because you use your residence for both personal and business purposes, however, you will be treated as having sold two separate properties: 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 will be taxed.

Prior to the Taxpayer Relief Act of 1997, you may have been able to avoid this problem by discontinuing using part of your home as an office in the year you sell it. Now, however, the 1997 Tax Act requires that tax must be paid in the year of sale for depreciation you've taken attributable to periods after May 6, 1997.

If you need any help in arranging things to save as much tax as possible on the sale of your home and office, we will be happy to assist you. Please do not hesitate to call any time for a confidential discussion.