Don't Bother Claiming It
John has a home office since he works from home. It qualifies for a deduction, and his accountant told him that anything he writes off will be taxable when he sells the house. Should he take the deduction on it?
QUESTION: John in Birmingham recently bought a house, and he has a home office since he works from home. It qualifies for a deduction, and his accountant told him that anything he writes off will be taxable when he sells the house. Should he take the deduction on it? Dave explains that he’s essentially depreciating his house.
ANSWER: To start with, here’s the deal: You take the value of the house minus the lot and your office that you use exclusively as office—and you never do anything in that room ever except office—and you use that as a percentage of your square footage, times the value of the house minus the lot. Then you actually figure out what you’re saving on taxes and you’re going to figure out that it’s about $1,000—maybe. You’re depreciating your home. When you sell the home, they recapture all of that as ordinary income. You write it off now as ordinary income, then you have to pay it with ordinary income when you do sell the home. Otherwise, your home would have grown completely tax-free, of course, up to $500,000 married, filing jointly. Because it’s not much money, it’s totally recaptured, and because this throws up a red flag for an audit, I have told people not to do a home office deduction. Those are my reasons.
For the few dollars that it is—and you’ll have to turn around and give it back anyway—it’s just not worth it. It would be a rare exception that it would be worth it.