Deducting the Home Office Gets Simpler
It’s never too early to start planning for filing your 2013 income tax. And there is some very sensible, good news if you are one of the nearly 3.4 million taxpayers who in recent years, despite strict guidelines by the IRS, claimed deductions for business use of a home. Those complex rules have stated that the home office space must be used exclusively and on a regular basis for either the entire business or its administrative and management activities. The days of using your kitchen table or a couch in the den as your home office are long gone.
Through 2012, a taxpayer has been required to fill out a 43-line form (Form 8829) including complex calculations of allocated expenses, depreciation and carryovers of unused deductions. But 2013 returns, to be filed in early 2014, will offer a new, simplified optional deduction from the IRS. The optional deduction will be capped at $1,500 per year based on $5 a square foot for up to 300 square feet.
“This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction,” said Steven T. Miller, acting IRS commissioner. According to the IRS, the new option provides eligible taxpayers a much simpler form for claiming the deduction.
What changed the mind of the IRS?
Not only are the current rules too complex but in addition, there has been an unfavorable, large tax liability due to depreciation recapture when a taxpayer sells the home. Good news for 2013 – the new option eliminates depreciation and its subsequent recapture tax.
According to an article in the February 24th edition of the Spokane Spokesman, “Currently a home office deduction is comprised mainly of depreciation, utilities and insurance. For example, if a home has 2,500 square feet and the old den used as the office is 250 square feet, then 10 percent of the utilities and insurance are deductible. The actual office depreciation is 10 percent of what would be a depreciation deduction if the entire home were being depreciated for tax purposes. (Depreciation is not allowed on a typical principal residence, so the square footage allotted to ‘residence’ would not qualify.) Supplies and other expenses directly related to the home office are fully deductible.”
To help with the process, the Internal Revenue Service’s Publication 587 “Business Use of Your Home” is accessible on the Internet at http://www.ustreas.gov. Under the present “ordinary” method, if you sell your home at a gain, any depreciation for a home office taken after May 6, 1997, will have to be “recaptured.’’ That means that any profit on the business portion is taxable as capital gain.
In a capsule, if you bought your home for $150,000 and sold it for a net figure of $300,000, your capital gain would amount to $150,000. Because the business portion does not escape the new primary residence exclusions, 10 percent, or $15,000 (the 250 square feet of office space) would be taxable.”
Still today taxpayers can avoid the home office tax by eliminating their home business use two years before selling their home. By doing so, they can revert their usage back to a 100 percent primary residence.
A home office is a popular amenity as a selling point for real estate!
Even with our current more complex tax rules, the home office has a significant impact in today’s real estate market. In fact, space to accommodate the home office is an extremely desirable amenity when listing a home for sale. Homes are being remodeled to have broader appeal to potential buyers by including space for the home office, while new home builders are including a versatile room that can be easily identified as a home office. The home office has become a craze as families search for space in which they can both live and work.
The article in the February 24th edition of the Spokane Spokesman closes with this reminder, “Remember, the new option becomes available on 2013 returns. If you sold your home for a gain in 2012 and claimed depreciation for a home office in 2011, you still face a tax liability on the depreciation recapture.”
“Imagine That™”!
Written by R. J. Kelly – April 2013