Home Office Tax Deduction: Why it’s not for me
Posted by Frugal on June 4th, 2006
When I started blogging, I talked to my accounting friend who is a CPA about taking home office tax deduction. Besides the trouble of maintaining and documenting the exclusitivity of the business usage, and sending a warning flag for audits, he advised me not to take any such deductions for the following financial reasons:
- If you own your home, the expense items that you can claim for such deductions are mostly mortgage interest, property taxes, insurance, and utilities. The biggest items are usually mortgage interest, and then property taxes, both of which can already be fully deducted through itemized deduction on the schedule A for your personal tax. Unless you rent, and have very big utilities bills, the total deductible amount that is otherwise not available in personal taxes, will not be very significant, especially after pro-rating of business usage area to the total.
- Any amount of depreciation of the home office will need to be re-captured as business gain at the time of the sale of your home. If no business conversion of the home is taken, your gain is tax-free if it’s $250K for singles, and $500K for couples. Those business gain can be defered through more complicated loopholes of 1031 exchange. But this 1031 exchange that involves both home & business will not be as straightforward as a regular 1031 exchange.
- Home office deduction is limited to your net business positive earning. You simply cannot use home office deduction and increase your business loss to offset against your other income like salary wages. Although you can carry forward the deductions that you cannot take in the current year, it is of no use if your business cannot produce significant income to take advantage of those deduction. You can check out form 8829 for home office deduction and Schedule C for business income.
Here are some other useful links for more information:
- Directly from IRS: home office deduction.
- From Quicken: Factors to Consider Before Taking Home Office Deduction. This article is very informative.
- A very good online calculator for home office deduction.
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June 5th, 2006 at 4:39 pm
This ties into #2, but besides having to recapture the depreciation taken on the “office” space, that portion of the home may not be subject to the $250k/$500k exclusion. Of course, if you switch the location of the office in the home so you used that space as residential in 2 of the 5 proceeding years, you’ll be fine.
For example, let’s say the house is 1000 ft^2, with 100 being claimed for the office. When you sell, 90% of the sales price is subject to the exclusion and the other 10% you have to recapture depreciation taken as well as pay capital gains on that portion of the sale (computed the normal way).
But, basically it’s a major pain in the rear anyway you slice it.
June 5th, 2006 at 5:10 pm
Merez, thanks for your additional clarification. As you said it, it’s much more pain than gain, as far as I can see it. I’m sure there are exceptions, but most circumstances don’t apply.
June 18th, 2006 at 7:48 am
Merez is a little behind the times. . .as long as the office is within the dwelling unit, you don’t have to bifurcate the sale. You do have to recapture the depreciation. See the final regulation under I.R.C. Section 121. . .
June 18th, 2006 at 8:54 am
Thanks Linda for your updated inputs. I’m not such a tax accounting expert, especially when I don’t plan to take such deduction.
November 7th, 2006 at 2:37 am
Many at-home workers simply don’t meet the IRS’s strict criteria for claiming the home office deduction.