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Working from Home? Keep the Door Open to Tax Benefits
When your workplace is as close as your basement or spare
room, the boundary between home and business probably gets
blurry at times.
If for no other reason than your taxes, however, it's important
to separate the two.
What's Deductible?
As the owner of a home-based business or professional practice,
you may be able to deduct various expenses related to using
your home for business purposes.
Some examples:
- Heat, air conditioning, electric
- Homeowners insurance
- Trash removal
- Cleaning services
- Building depreciation
Since many expenses relate to the entire home, the calculation
of the business portion is usually accomplished using square
footage.
| Example.
The square footage of Meredith's home office is 10% of
her home's total square footage. Last year, Meredith paid
$1,200 to heat her home. She may deduct $120 (10%) as
a business expense, provided she meets the tax law's requirements
for a home office deduction. |
Off Limits
Deductions for an "office" in the home are generally
available only if the space is used regularly and exclusively
for business. The exclusive-use rule can be particularly difficult
to follow.
| Example. During
business hours, Derek's home office is used strictly for
business. But Derek also uses it as a bedroom when his
kids visit. Derek's office doesn't qualify as a home office,
even though there is no personal use of the room during
the workday. |
Selling the Home
Ordinarily, you may exclude up to $250,000 of capital gain
($500,000 if married) from your income when you sell your
home, provided you have owned and used it as your principal
residence for at least two of the five years before the sale.
When you have a home office, however, you have to pay tax
(at a 25% rate) on capital gain up to the amount of prior
depreciation on the home. Any additional gain can qualify
for the $250,000/$500,000 exclusion.
| Example. The Garcias made a
$100,000 profit when they sold their principal residence.
Although they meet the tax law's requirements for a capital
gain exclusion of up to $500,000, they will have to pay
tax on $15,000 of their profit - the amount they previously
deducted as home office depreciation. |
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