Comments on: Rules for Home Office Depreciation for Businesses

By: ChrisCPA

ChrisCPA — Thu, 19 Oct 2006 17:13:26 +0000

My bad, James is exactly right, gain on the sale of a home is excludable from income to the limits, 250k & 500k, except the depreciation taken on the home office is recaptured & taxable…

By: James

James — Wed, 18 Oct 2006 21:12:17 +0000

The above comment from ChrisCPA is incorrect. The exclusion DOES NOT cover gain from depreciation. Here’s the relevant snippet from IRS Publication 523, page 17:

Depreciation after May 6, 1997. If you were entitled to
take depreciation deductions because you used your
home for business purposes or as rental property, you
cannot exclude the part of your gain equal to any deprecia-
tion allowed or allowable as a deduction for periods after
May 6, 1997. 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.

When you sell your house, you will owe tax on the gain due to depreciation (unless your house actually went down in value).

By: ChrisCPA

ChrisCPA — Wed, 18 Oct 2006 18:11:11 +0000

The depreciation taken on a home office is used to reduce the basis of your home – which, in turn, can increase your gain from the sale of the home, but this probably won’t effect most individuals – as their gain won’t reach the exclusion limits (250k, 500k). Also, a home office is depreciated over 39 years…Hope that helps!

As CK said, it is a good to consult a professional before doing this.

By: CK

CK — Wed, 18 Oct 2006 16:23:12 +0000

If you are considering doing this please talk to a CPA. Remember with the IRS you’re guilty until proven innocent.

By: 2 million

2 million — Wed, 18 Oct 2006 15:21:24 +0000

Im no expert, but I thought you would be able to depreciate the structure on the 27.5 schedule (not 39yr) for the home office? Can someone confirm?

By: James

James — Tue, 17 Oct 2006 22:18:37 +0000

Maybe I’m misreading your article, but it sounds like you’re saying that the $500,000 primary residence exclusion will cover up all of the gain you’re likely to make on the house, even after adjusting the gain for depreciation. Is that what you’re saying?

My understanding of the primary residence exclusion is that it doesn’t apply to gain from depreciation. If you take the home office deduction, then that $369.15 in depreciation will be considered taxable gain when you sell your house, even if your actual gain is far less than the exclusion limit of $500,000. Check out Publication 523. The non-numbered example on page 17 spells this out pretty clearly.

http://www.irs.gov/pub/irs-pdf/p523.pdf

Since you’ll be getting the tax benefit this year instead of when you sell the house, it’s kind of a wash, unless you’re in a different tax bracket when you sell. If that’s what you meant by “a non-issue, in terms of a net effect”, then my apologies for misunderstanding.