If you’ve read my books, articles or columns, heard me on the radio for “Tax Wednesdays” or seen me in person, you’re bound to know that I love the home office deduction. I talk about it a lot. I also hear a lot of bad information about reasons why not to take the home office deduction.
One of the issues that I hear about is what happens when you sell your home after you’ve taken the home office deduction. Read on to learn more about this deduction plus review the rules on what it takes to get a legitimate home office deduction.
Let’s start with the rules on getting the home office deduction. First of all, you must have a legitimate business. You can’t simply start a business for the sole purpose of taking a deduction. It must be a business in the eyes of the IRS and that means that you have a profit motive and you are keeping good records.
A home office must be a space in the home that is used exclusively for business purposes (no corner of the dining room table!) and regularly for business. You can have another office location. You don’t have to see clients there. You just need to first of all have a business and secondly have exclusive and regular use of the home office for business purpose.
But what happens when you sell? If you’ve got a principal residence, you can take a tax free capital gain exclusion. A married filing jointly couple gets $500,000 in a gain exclusion. A single taxpayer gets $250,000. In the past, there has been a concern that when you take a home office deduction, you’ve actually converted some of the space to a business purpose.
The IRS told us in 1997 that if you have a home office that is part of your residence (in other words, not in a separate building or dwelling unit) you do not have to attribute any of your gain when you sell to the home office. This is a great deduction! In other words, you get to take the home office deduction PLUS you get the full advantage of the tax free gain exclusion when you sell.