J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Impact of Home Office Deductions on Home Sales

Claiming a home office deduction does not impact your ability to claim the home sale exclusion (up to $250,000 of gain; $500,000 on a joint return) if you otherwise qualify for it. In the past it had been reasoned that gain on the portion of the home used as a home office would have to be reported. However, recent regulations make it clear that the exclusion can be applied to the home office portion as well, as long as the office is within the dwelling unit.

However, any depreciation taken on a home office after May 6, 1997, must be recaptured at the rate of 25% (for taxpayers in tax brackets over this amount). This means you must report your total depreciation deductions related to home office use after this date and must pay tax on the total amount at the rate of 25%. You cannot use the exclusion to offset this tax.

You cannot avoid this recapture by choosing not to report depreciation to which you are entitled. Recapture applies to depreciation both allowed (the amount you actually claimed) and allowable (what you were entitled to claim). If you want to avoid depreciation recapture, you must sidestep the home office deduction entirely by disqualifying your home office. You can do this easily by not using the space exclusively for business. By disqualifying your home office, you lose out on depreciation but can still claim many related costs, such as office maintenance and utility costs, as ordinary and necessary business expenses. ...