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Sell your primary residence with a home office avoiding capital gains

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Avoiding primary residence capital gains tax on home office

The primary residence capital gains tax is something you can avoid.  You can even be avoiding capital gains tax when you have a home office.  Your Uncle Sam really favors home owners.  Not only does he allow you some tax free gains on your principle residence.  He also gives you more tax free and deferred cash if you use the home as your office or rental.  You must know the rules and play the game accordingly to avoid the taxes.  It takes some planning but as you will see it is well worth it.  I have been using my primary residence property as a rental for the past 2.5 years.  I will employ these rules to avoid and defer tax liability.  The strategy involves combining Section 121 exclusions with a 1031 exchange

Tax Free Sale of Home with Home Office

You bought a home for $200,000 and sell it for $300,000.  Over that time you have taken $30,000 in home office depreciation, which is 20% of your home.   Your adjusted cost basis in the property is $170,000.  This gives a capital gain of $130, 000.  This is how it breaks out.

The IRS defines the order on which the exclusions are made:

  1.  Section 121 comes first.  It cannot be applied to depreciation claimed after May 6, 1997.
  2.  Tax on gain is imposed on gains over the Section 121 limits.
  3.  1031 exchange is applied to the business portion to defer business tax liabilities
  4.  You add the Section 121 exemptions to the adjusted basis of the new property.
Total Home Office
Basis of Property $200,000 $160,000 $40,000
Depreciation ($30,000)  NA ($30,000)
Adjusted Basis $170,000 $160,000 $10,000
Gain from sale $130,000 $104,000 $26,000
Section 121 exclusion (1, 2) (120,000) ($104,000) ($16,000)
1031 Exchange (3) ($10,000) NA ($10,000)
Gain subject to tax Zero Zero Zero

The example shows that 15% capital gains tax was avoided and the 31% tax on ordinary income.

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DISCLAIMER

This article is for training purposes only.  Jody Wall does not warranty the accuracy of the training.  It is not intended to be legal or accounting advice.  Seek competent consultation for your particular situation. Readers assume all responsibility for their decisions.

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Home office tax deduction

Home office tax deductions can save you thousands

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Home Office Tax Deductions Defray Living Expenses

Home office tax deductions offer so many tax advantages it makes me wonder why more people

Home office

Home office

do not start their own business.  One of the rewards of being a business owner is cutting back on the daily commute grind.  The home office is a way to transfer some of your living expenses to your business and get a deduction.  Some of the benefits of the home office include:

  •  Deduct a portion of mortgage interest, taxes, insurance, utilities
  •  Repair deductions – repairs on your principle residence are not deductible but office repairs are.
  •  Pest control
  •  Office equipment depreciation
  •  Building depreciation

Home Office Tax Deduction Limits

These amounts really add up.  The amount of the deduction is limited to the income from the business.  If you no income, you do not have a deduction.  If you have little income, you have little deduction.  You may think, “I do not make any money now so the home office deduction is not worth it.”  That thinking is faulty.  I always say, “Every deduction is sacred.  Every deduction counts.  Deductions shall not be wasted.  Oh make the tax man shout.”  Claim the deductions now and every year.  They can be forwarded to future tax years in perpetuity until you do have income to attack.  If you are in business, you intend to make money.  When you do, limit the amount the tax man taketh.

Example Home Office Tax Deduction Calculations

 The table calculates the home office deduction of 10% office use of a 1400 square foot home.  You paid $140,000 for the home. 

Item Gross Expense Office Percentage Deduction
Interest $5,136 10% $513.60
Property Tax $2,400 10% $240.00
Insurance $800 10% $80.00
Utilities $3,200 10% $320.00
Depreciation $4,364 10% $436.40
Repairs – whole house $3,000 10% $300.00
Repairs -office $400 100% $400.00
Total $1,854.00
25% tax Bracket $463.50

I know I would rather have the $463 in my pocket rather than the governments. If I deferred this amount for two years, it will still be a tidy sum and will be added to the intervening year’s deductions.

Vehicle Tax Deduction

Commuting to work is not considered business miles.  Eliminating the commute will lower the number of personal miles on your vehicle.  You benefit from a higher percentage of business use and save yourself the wear and tear on your vehicle and your stress.  I certainly do not miss sitting in traffic 90 minutes a day.

DISCLAIMER

This article is for training purposes only.  Jody Wall does not warranty the accuracy of the training.  It is not intended to be legal or accounting advice.  Seek competent consultation for your particular situation. Readers assume all responsibility for their decisions.

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