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Tax Tip of the Week
For the week of
March 17, 2003

There's good news for taxpayers who claim a home office deduction

If you've been deducting home office expenses and you're now ready to move, you'll like the new rules issued by the Internal Revenue Service. That's because when you sell your residence, you may be able to exclude most of the gain on your home office.

There are caveats: You'll have to pay tax on gain to the extent of depreciation you claimed after May 6, 1997, and you must have used the home as your primary residence for at least two of the five years before the sale. In addition, your office must be part of your home. If you operate your business from a separate apartment or a detached garage, the tax exclusion doesn't apply.

If you meet the requirements, the change can offer tax advantages. Here are two:

  • Additional deductions. You no longer have to forego claiming home office expenses prior to selling your home.
Under the old rules, to qualify for the full exclusion on the sale of your residence, your home office had to be converted from business to residential use. Switching meant you missed out on home office deductions in the two years before the sale. The new rules eliminate this problem.
  • Reduced taxable gain. Assuming your office is part of your residence, you'll be taxed on any gain only to the extent of depreciation you've deducted since May 6, 1997.
Before the change, the sale of your home was reported in two parts: home office and living area. Gain on the business portion was taxable. That's no longer the case. Under the new rules, a gain on the home office portion is excluded (as long as you meet the above requirements).

The revised rules are effective for homes sold after December 23, 2002, but can be applied retroactively. If you would have qualified for the gain exclusion in a prior year, your return can be amended. For details, call us.




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