Copyright 2003, Marc S. Weissman
Certified Specialist: Estate Planning, Trust and Probate Law
Certified by the California Board of Legal Specialization of The State Bar of California
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12/24/2002: IRS ISSUES HOME SELLER REGULATIONS Regarding Home Office
Partly used as Principal Residence:
HOME OFFICE: The IRS has given us an incredible present. In 2000 the Home Office Rules were liberalized. Then the law allowed exclusion of gain for the Residence. (Those were gifts from Congress.)
We all assumed that the home office portion was not eligible for exclusion. Example: If I bought for $400,000, and used 25% as a home office, and took $30,000 depreciation over the years on the home office, when I sell for $600,000, (profit of $200,000) I can exempt all the $150,000 profit on the portion used as the home, but 25% of the profit ($50,000) is attributable to the home office, not eligible for exclusion.
We thought the only solution was to discontinue using the home office for 2 years before the sale. (That would work to qualify the entire $200,000 profit for the exclusion, but there would still be depreciation recapture.)
Now the IRS present: IRS Reg 1.121-1(e)(1) states that allocation of profit to the non-qualified use is NOT required IF the home office is entirely in the same dwelling unit. Let's simplify that: If it's inside your home, although the depreciation recapture is still taxable, the profit is eligible for exclusion!
Back to the example: My $200,000 profit is excluded. (I still have depreciation recapture of $30,000.
IF the business use is on the grounds of your home, but not within the dwelling unit (example: home office in an outbuilding) profit attributable to the business portion is taxable.
All of these Regs may be applied retroactively.
See Full Home Seller Article