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Can I get a Tax Deduction for my Home Office?

S hould you take a tax deduction for your home office?

Even if you are eligible to take a tax deduction for your home office, there are times it may not be worth doing so. Why? In one word – depreciation. When you deduct your home office expenses (i.e. mortgage, real estate taxes, insurance), the IRS will likely assume you have taken depreciation on the part of your home that is being claimed as an office, whether or not you actually did take it on your tax return.

The problem? Normally home owners get to exclude upto $250k (single) or $500k (joint) in profits on the sale of their primary residence when they sell. If you have claimed part of it as a home office however, you are required to recapture part of that excluded gain. In other words, if 20% of your home is being claimed as a home office, and you have a $250 gain as single filer, $50k of it may be be subject to taxes, and only the $200k can be excluded*.

My take on the situation depends on each client’s unique scenario, but generally, I tend to explain that it may be beneficial to not claim any home office deductions. In my experience, unless it’s a significant amount, it’s usually not worth the hassle. Other business expenses like cell phones, office supplies, equipment, and even furniture purchases are generally fair game, and can be deducted in an attempt to maximize tax benefits. Where I guide people to be careful are grey areas such as cleaning, maintenance, and utilities that are incurred on behalf of the entire house.

Not sure whether to take a certain deduction for your business? I’ve done numerous small business tax returns for myself and others. Contact me and let me help you with yours. Or, if you decide to file on your own, remember this – when it comes to the IRS, it’s better to be safe than sorry. Only take the home office deduction if the costs will be worth the benefits. Happy filing!

*Source: IRA Publication 523

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