How is that so? Basically, its because when you take a home office
deduction, you are in essence converting that portion of your home that you use
as your office to "business property." When you later sell your
home, you may end up paying tax on part of your home-sale profit.
Many taxpayers who have taken advantage of the home office deduction rules
over the years are surprised to learn that the home-sale tax exemption ($500,000
for joint returns and $250,000 for unmarried individuals) can't be used to
protect the portion of your gain that is equal to any depreciation deductions
allowed for business or rental use of the property for periods after May 6,
Basically, the home-sale exemption requires that 100 percent of your home
qualify as a principal residence for at least two of the five years preceding a
sale. If you decide to take the home office deduction and determine that
10% of your home is used for your business office, then 10% of your home-sale
profits will be subject to capital gains tax. The home-sale exemption
can be used only for the portion of your home used for personal purposes for at
least two of the five year
We often advise our clients against using the home
office deduction if they have plans of selling their home within a few years for
a very large profit. The tax savings they receive from taking a home
office deduction could pale in comparison to the capital gains tax they might
have to pay when they sell their home.
does not mean that you should never take advantage of the home
office deduction if you have plans to sell. With some very
careful planning, you may still be able to take the home office
deduction so long as you don't claim it for more than three of the
last five years before you sell your home.
as we stated above, the home-sale tax exemption simply requires that
you maintain 100 percent of your home as a principal residence for
at least two of the five years preceding a sale.
would encourage you to contact us before converting a portion of
your home into an office with the intentions of taking the home
office deduction. As you can see, there is a huge trap that
you need to avoid and some long-range family planning issues that
need to be discussed beforehand.