NFIB

Deducting for Work at Home Can Backfire When You Sell
03/ 28/ 2002

by Peter Weaver

Last year was the first full year where more taxpayers could qualify for home-office deductions. You may do your work elsewhere, such as catering or consulting, and still get all the deductions involved in having a home office where you do your administrative work.

That's the good news. The bad news is the fact that when you sell your home, the IRS can still "recapture" all the money you deducted as depreciation for business purposes. This can turn out to be a financial time bomb.

When you sell your home, you have to add up all the depreciation deductions for the office space, whether you took the deductions or not, and pay it back to Uncle Sam. You also will have to pay a tax on the profit related to the business area of your home when you sell. People without home offices don't have to pay any tax on sale profits up to $500,000. People who rent, of course, have no problem with depreciation or profit on the sale.

There is an out for homeowners who want to avoid the profit pitfalls. According to San Antonio, Texas, based small-business CPA Jim Oliver, "if you were not eligible for the home office deductions in any two years within the last five years before you sell your home, you don't have to exclude the office portion from the profit you make." Unfortunately, he says, you still have to pay back the depreciation deductions. However, they only start counting after May 6, 1997, when the ruling went into effect.

There have been so many taxpayer and tax preparer complaints about the depreciation payback situation, you might see some legislation activity this year aimed at correcting the problem.

Depreciation costs are only one home office deduction. There are several others that tax professionals say are sometimes missed. For example, a percentage of any maid or cleaning service is deductible. Ditto for utility bills, mortgage interest, property tax and home-owner and car insurance. A portion of certain repairs and modifications may also be deductible.

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This article originally appeared in the March/April 2001 issue of MyBusiness Magazine, NFIB's member magazine.

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