The Home Office Tax-Deduction – Can I Claim Mine?

David Moore: Hello, David Moore with Equity Advantage, 1031exchange.com. And, today we’re going to talk a little bit about home offices. So I’ve got to laugh because if you look out there, the world’s a different place than it was a year ago. So, a lot of people that maybe never thought they were going to be working at home are now sitting in their pj’s watching this video. But the deal is, a lot of people are starting to work from home again. And if they’re doing that, they might have a conversation with their tax counsel and they might discuss having a home office.

Now, why would I care about that from the 1031 world? Well, think about this. You define what you can and can’t work with, with a 1031 exchange. Now, we lost personal property in 2017 with tax reform, but real property is something that we work with and real property held for investment.

So when we look at things, we have to understand what is real property held for investment? And, a lot of times the question gets brought up, well, what’s like kind with a 1031? The like kind definition refers to the nature of the investment rather than the form. Any real property held for investment is going to be like kind with any real property acquired with the intent to hold for investment.

David Moore: Now, if you’ve started working from your home and you just now have started treating that home office as a home office for tax purposes, what have you done? You’ve converted a piece of your home to investment property, investment real property so at least 1031 applies. But, I would throw it out to you that with any benefit comes a burden, right? So, if you start treating this home office as a home office, you start depreciating it.

The benefit is you’d take depreciation, might save you some tax revenue. On the downside, if you sell that property and that home office has existed for more than three out of the preceding five years, now you’re in a situation where you’re going to be paying tax on that component of that home sale, or you’re going to have to do an exchange of a portion of your property. So you think, well, gee, it’s my home. I don’t need to do that. Now think about what Section 121 says. Section 121, the universe exclusion says, as long as you’ve occupied a home for two out of the preceding five years, you’re entitled to $250,000 exclusion on gain individually or a married couple has up to $500,000. Now you’re thinking, gee, I’m selling my home. I’ve got those gains. They fit within those numbers. Now, if you’ve started treating this property as a home with a home office, now that portion of the home that is a home office, you’ve got to start looking back on how long you’ve been doing that.

David Moore: If you’ve been treating it as a home office for less than three out of the last five, you can sell that home. Still take the exclusion on everything. You’re probably going to have tax exposure on depreciation recapture, but beyond that, it would go away. If that home office has existed for more than three years, it’s now outside of Section 121’s exclusion requirements. And, now you’re at a point where you’re going to have to do an exchange or you’re going to pay the tax.

So just to understand, with every gift comes a negative side. And when you’re going to sell something, typically people think you could have a single sale with allocations, residential and investment. Examples of that typically would be a duplex, half-owner occupied, half non-owner occupied. Let’s say it’s bed and breakfast. You’re living in a portion of it. Same thing.

David Moore: You might have a large home on acreage. You’ve got the home and then you’ve got the working land. All these are examples of the single asset with allocations, two different directions. An allocation Section 121 and an allocation 1031. And I’m putting it out to you that a home office is going to put you in the exact same boat.

So understand when you’re doing these things, you need to work with your tax people to understand what you’re doing. And this is going to come back to, when should you reach out to the exchange company to talk about any future transaction? Or, when should you talk to your tax people? Don’t talk to them April 14th. Talk to them before you decide to sell anything. Take advantage of those professionals in your life. But in today’s world, we’ve got more and more people looking at home offices again, and for a whole variety of reasons.

David Moore: But understand if you start treating it as such for tax purposes, when you go to sell your home, you’re going to have to address it potentially. So, take advantage of the tax people in your life. Ask the questions before you sell anything, so you’re not getting that rude awakening with an audit in the future, and they’re telling you, you now owe money on the portion of your home that was a home office. If you’ve got further questions on this topic, please don’t hesitate to reach out. Be happy to discuss them with you. And, I thank you for the time today. David Moore, Equity Advantage, 1031exchange.com. Have a better year. Bye-bye.