Small Business Taxes Made Easy by Eva Rosenberg

Author:Eva Rosenberg
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2017-03-18T04:00:00+00:00

Another Attractive Change to the Law Affecting Homeowners Only

Before May 6, 1990, there was a consideration even more daunting than IRS audits for people who planned to sell their homes within a few years. You would lose the $250,000 ($500,000 for couples) personal residence exclusion on the business portion of your home. As a result, when you had a large gain on the sale, you would have to pay tax on the business percentage of that gain. For instance, let’s say you used 15 percent of your home as your office. Your home was worth $200,000, but you bought it for $100,000 several years ago. In the past, when you sold the house, $170,000 would have been treated as sale of your personal residence. The gain would not have been taxable since it’s less than the $250,000 exclusion per person. But $30,000 ($200,000 × 15 percent) would have been treated as the sale of business property. Without going through all the numbers, essentially, you would have had to pay $3,000 to $5,000 in IRS and state taxes on the sale, depending on how much depreciation you had taken.

That additional tax is no longer an issue. Under the present law, you get to treat the whole house as your personal residence when you sell it. You only have to pay tax on the depreciation you’ve deducted. Since most people don’t get to deduct more than $500 per year of depreciation, the tax doesn’t usually amount to much. (See http://iTaxMama.com/Sale_Home_Ofc.)

New computation complexities have arisen as a result of the Housing and Economic Recovery Act of 2008. They affect second homes used as rentals. They won’t affect your office in home. So relax. It’s all right to use office-in-home deductions if they apply to your business.

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