I have a home office. Will I have to pay taxes on it if I sell? What happens if the home sells at a loss?
In the eyes of the Internal Revenue Service, a home office is considered to be a commercial property or more specifically, a Section 1250 Property. As a result, it’s subject to depreciation, which allows you to take an income-tax deduction to recover the initial cost of any equipment and certain types of property, as long as those assets are still in use.
When you sell the property, any gains you realized from depreciation deductions at the time of sale will get hit with a federal tax that can run as high as 25%. (This is known as a recapture liability and only pertains to home-offices that are attached to a main residence only. Read our story for what to do about detached home offices.) State taxes may also apply.
The good news: “If there is not a gain, then there is no recapture,” says Julie A. Welch, an accountant in Kansas City, Mo. Say, a home-based business owner purchased her home for, $165,000 and made $200,000 worth of improvements (her total investment: $365,000). Several years later, however, she could only sell her home for $340,000, not $365,000. Since the business owner would be selling at a loss, not a gain, she wouldn’t be subject to a recapture liability and therefore wouldn’t get taxed.
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