Home office separate structure and capital gains

[JohnB_303]

I’m considering using the actual method to take the home office deduction for my office above our detached garage. I’m hesitant because I’ve read that by doing this, I will be responsible for capital gains taxes on that portion of the profits from a sale of the house in the future. This is because it is a separate structure, apart from the main home. 

I’ve also read that these taxes can be avoided if, for at least two years before selling, we “own and live in that portion of the home as our primary residence”.

Now, I’m assuming that doesn’t mean we have to move all our belongings into the “carriage house” office and sleep there for two years, right? If I simply stop claiming it as a home office and we continue to live in the main house, using the office garage area for storage or guests, would that be sufficient to avoid taxes when selling the property?

I realize there would still be depreciation recapture, but I’d be getting more from the deduction in the interim. I’m only worried about the capital gains separate structure tax.

Hypothetically, let’s say there’s an emergency and we have to unexpectedly sell our home quickly. Could I amend the previous two years returns to not claim the home office deduction and also avoid the capital gains that way, in a pinch?

[ColeenD3]

All that will happen is that you will have to recapture depreciation. You will realize a capital gain regardless unless the gain is excluded. No, you don't have to physically move into the space. If it was empty the entire time you owned the house and you never had an office there, it would still be part of your home.

It will be treated the same way as a room in your home. You would be including the expenses for the entire home, on a prorated basis. It is still attached since it is over the garage.

[JohnB_303]

Thanks Coleen. The garage is a completely separate structure, detached entirely from the main house. Above it is a small 1 bedroom apartment I’m using as my office. Are you saying that because the office touches the garage, it’s not considered a “separate structure home office”?

 The capital gains exclusion is what I’m worried about. You cannot exclude capital gains on the portion of the sale that is a separate structure home office. I’d rather consider the office as part of the main home and not worry about that exclusion rule. 

Perhaps I’ve been thinking about it wrong, since it technically is attached to a detached garage, and the garage is our regular garage we use every day?

[JulieS]

Yes, your home office is not a completely separate structure because you are not using your entire garage as a home office. 

[texaspaulster]

My question is how to enter this on my turbotax.  My office is not connected to my home.  It's 144sq ft.  Turbo Tax has a space for HOME OFFICE sq ft and ENTIRE HOME sq ft.  Do I enter the sq ft of my home, even though the office is not connected?  Thanks

[DianeW777]

No.  Do not use the home office section of TurboTax for the depreciation of the office asset since you actually have a separate structure that is strictly for your home office. Instead add a new asset to your business schedule and use only the cost of that home office structure for the cost basis.  Do not include any land. Use the total square feet of the home, then divide the square fee of the office by the total for the home to arrive at the business use percentage.  

For the expenses that are not separated out by your home and the home office you will enter those in the home office section by using the same percentage you calculated above (insurance, mortgage interest, real estate tax, utilities as example).

@texaspaulster

[texaspaulster]

"For the expenses that are not separated out by your home and the home office you will enter those in the home office section by using the same percentage you calculated above"

That is exactly what I have been wanting to know.  It is the last thing for me to work on.  Thank you.  My mind didn't understand why the home office ask the question, is this separate from the home?  but didn't follow up on it.  Thanks for the clarity. 

[jswolfgramm1119]

I have similar situation. Looking for some clarification to your reply. 

1. Where do I add the separate structure as an asset?

2. Also, the separate structure was paid for separately from the house mortgage. We had a personal loan for part of the expenses. How do I account for that? The loan is in our name, not in the business name. Does that matter? can I still put it as a business loss/expense?

[DianeW777]

The answers to your questions are in the order you placed them.

1. Enter a new asset for your business as the separate structure - do not enter it in the home office section.
2. Interest paid on the separate structure, if it is 100% business use, is deducted in full as interest expense on your business Schedule C.
3. If  you have any utilities or other expenses that are not separated by home and office then use the square feet of the office divided by the total square feet of the combined residence and office to arrive at the business use percentage of those expenses. Enter them directly on the Schedule C or in the Home Office section.

@jswolfgramm1119