In the days leading up to April 15, let’s check some of the reasons working at home continues to make sense, even for seniors and aging baby boomers. Be aware, however, that the tax sting of eventually selling your palace with a place to work often is underestimated.
It’s now relatively easy for taxpayers to deduct the cost of a home office. To qualify for a deduction, the space must be used exclusively and regularly for either the entire business or its administrative and management activities.
The management provision was added in the Taxpayer Relief Act of 1997. It enables a home-office deduction for any trade or business of the taxpayer as long as there is no other fixed location where the taxpayer “conducts substantial administrative or management activities of the trade or business.” The deduction is not curtailed if associates at other locations perform some management or administrative activities.
A home-office deduction comprises mainly depreciation, utilities and insurance. For example, if a home has 2,500 square feet and the old den now deemed “the office” is 250 square feet, then 10 percent of the utilities and insurance are deductible.
The actual office depreciation is 10 percent of what would be a depreciation deduction if the entire home were being depreciated for tax purposes. (Depreciation is not allowed on a typical principal residence, so the square footage allotted to “residence” would not qualify.) Supplies and other expenses directly related to the home office are fully deductible.
The area used for your home business can be depreciated using the 39-year depreciation method. The lower of your home’s adjusted cost basis or its market value on the day business use began can be the starting points.
However, these benefits do come at a price. The tax law states if you sell your home at a gain any depreciation for a home office will have to be “recaptured.” That means that any profit on the business portion is taxable as capital gain.
So if you bought your home for $150,000 and sold it for a net figure of $300,000, your capital gain would amount to $150,000. Because the business portion does not escape the new primary residence exclusions, 10 percent, or $15,000 (the 250 square feet of office space) would be taxable.
One way of avoiding the home-office tax would be to eliminate your home business two years before selling the home. If you can find another place to work, you could revert the usage back to a 100 percent primary residence.
It’s always best to consult an accountant or a tax attorney. The Internal Revenue Service’s Publication 587 “Business Use of Your Home” is accessible on the Internet at http://www.ustreas.gov.
Homes that can accommodate an office are becoming as desirable a selling point as any other home amenity.
While resale homes often have to be remodeled to include home-office space, many designers are helping builders with new plans that include one room that’s versatile and can be easily identified as a home office. Some real estate agents say home offices sometimes help make or break a sale in a relocation situation, especially those involving double incomes and senior citizens.
Transferring your base to the home can be a good idea, yet consider an exit strategy long before you sell. You could get hit with a recapture surprise.
Tom Kelly, former real estate editor for The Seattle Times, is a syndicated columnist and talk show host.