Friday, April 30, 2010
Capital Gains Consequences of Home Office Deduction
June --
My companies HQ are in CA. Software support engineer. I've been fortunate enough to work from a home office since my daughter was 4 weeks old. She used to stand on the back of my chair with her arms wrapped around my neck while I would talk with customers. It doesn't get any better than that.
I've read your information about a home office but what are the consequences of claiming a home office? I heard that the nightmare actually occurs when I go to sell my home.
Can you provide some insight into that?
Thank you.
Paul
Hendersonville, NC
Yes, Paul. I remember those work-at-home-with-small-children days. They were great. I still work from my home.
Before I answer your question I'd like to request of you and other indies: When you say you heard or read something somewhere I would really like to know where you read or heard it. It helps me guide indies if I know whether they got wrong info from Aunt Tillie or a CPA or the yoga teacher's husband who happens to be an attorney.
As I say in my book Self-employed Tax Solutions : "Deducting OFFICE-IN-THE-HOME expense for a residence that you own may have an impact on your the amount of taxes you pay when you sell your home. The impact has been minimized by new regulations regarding depreciation of a home office, and almost always the home office deduction outweighs any capital gains tax it may trigger when the home is sold. Even so, be sure your tax pro takes the sale consequences into consideration when preparing your return."
Since I wrote that the tax regs regarding home office sale have been liberalized even more. Of course, the regs may again change in the other direction. I can say that in all my years of practice every indie client had a tax advantage by deducting home office that was not outweighed by capital gains tax at sale.
Best,
June
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1 comment:
Here's an email exchange I had with Paul that will show the importance of checking out what someone means before responding to a question. In this case, I made the wrong assumption.
June, thanks for the reply.
In your explanation you asked:
BEFORE I ANSWER YOUR QUESTION I'D LIKE TO REQUEST OF YOU AND OTHER INDIES: WHEN YOU SAY YOU HEARD OR READ SOMETHING SOMEWHERE I WOULD REALLY LIKE TO KNOW WHERE YOU READ OR HEARD IT. IT HELPS ME GUIDE INDIES IF I KNOW WHETHER THEY GOT WRONG INFO FROM AUNT TILLIE OR A CPA OR THE YOGA TEACHER'S HUSBAND WHO HAPPENS TO BE AN ATTORNEY.
In my case it was my dad. While he was still alive, in his retirement, he worked for H&R Block during the season. He was the one who told me that deducting a home office may be a benefit now but it catches up with you when you go to sell your house.
BTW, I worked the numbers during this last season and was disappointed to find that it only came about half-way to the 2.2% I had to exceed in order for it to pay off. This was really disappointing since I use an entire room for nothing else but business work.
Thanks again.
Paul
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Hello Paul,
Thanks for filling in the details. Taxes on home office have changed in the last 30 years. They have become more advantageous, but even back then they still benefitted the home office user.
What do you mean here: I WORKED THE NUMBERS DURING THIS LAST SEASON AND WAS DISAPPOINTED TO FIND THAT IT ONLY CAME ABOUT HALF-WAY TO THE 2.2% I HAD TO EXCEED IN ORDER FOR IT TO PAY OFF.
Thanks.
June
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Hi June,
Thanks for the reply.
I use TurboTax and walked through all of the questions for square-footage, utilities use, etc. and in the end the calculated amount was about $1,100.00. However, T-Tax told me that since it didn't exceed 2.2% of my income, which is about $104,000 for this past year, it had no effect on my refund (actually, reduction of my payment).
I thought that 2.2% was kinda strange.
What do you think?
Paul
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TurboTax!!!!!
I assumed you were an indie. Am I wrong?
June
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Hi June,
No, I am not an independent entrepreneur. I tried to explain that in my very first email. My companies HQ are in CA and I work from a home office in NC.
Paul
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Hi Paul,
Even indies have "headquarters." I assumed you were an indie b/c you were writing to me.
The place where non-indies must deduct businesses expenses is much less tax advantageous than where the self-employed get to deduct their expenses.
Often , altho' theoretically an employee business expense may be deductible, in actuality it nets little or no tax savings.
Sorry for the confusion.
Best,
June
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