It would seem that your education on how taxes work for your specific needs is a bit skewed.
For starters, I would fully expect declaring an entire residential property as a home office would raise eyebrows at the IRS. However, do the local laws and ordinances of the location where the property is at permit you to classify the property as your primary place of business? If so, then after running that change through the local government authorities and getting it approved and reclassified as such, declaring the entire property as the primary physical location of your business for federal and state tax purposes would not be an issue. However, the classification and permitting cost to do that for only a year or less would probably not be worth it financially. It would most likely be significantly cheaper and make more sense to just rent office space in a commercial building intended for exactly that.
I didn't take depreciation on this property.
Wait a minute. You started your post with, "Let's assume that I am a high paid consultant working as a sole proprietorship." indicating this is something you were considering. Now the above statement seems to indicate that this is something you have already "in fact" done. If this is something you've already done without having done your homework first, then you're stuck with what you got unfortunately.
Understand that depreciation is not an option. It's required by law.
That said, depreciation recapture on property is 25%?
That's another clear indicator that either you don't understand what depreciation is and how it works, or (and the more likely) you misinterpreted whatever IRS publication you may have read, about depreciation.
You are required by federal law to depreciate any property used in a business. Passive business assets, such as residential rental real estate, are depreciated over 27.5 years. Non-passive business assets such as the building that is your primary place of business, is depreciated over 39 years. So any structure used for your SCH C business would be depreciated over 39 years. (There are exceptions, but they don't appear to apply here and I'm not going to add to the confusion by covering it.)
In the future when you sell or otherwise dispose of the property, you have to recapture all prior depreciation taken and pay taxes on it, in the year of disposition. You will be taxed on that recaptured depreciation anywhere from 0% up to a maximum of 25% in that year of disposition. Additionally, the recaptured depreciation will increase your AGI in that tax year, potentially bumping you into the next higher tax bracket. But if the tax bracket you're in is higher than the 24% bracket, that recaptured depreciation is still taxed at a maximum of 25%.
Overall, you need professional tax help. Especially if you state taxes personal income. Mistakes could easily become a double whammy for you with the IRS, as well as the state.
