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dillon
Returning Member

Selling your home, home office deductions, and Form 1099-S

When someone sells their home, they don't usually owe taxes on the proceeds of the home sale. But during the closing process, the closing agent asks if the owners used the home for business and/or claimed the home office deduction. If they answer yes, that triggers a 1099-S form.

 

Can someone please help me understand how claiming the home office deduction and/or using the home for a small side business would impact tax liability? Would someone in this situation now owe taxes on the proceeds of their home sale? And if so, how would they go about estimating that tax?

 

Thank you!

 

2 Replies
Critter-3
Level 15

Selling your home, home office deductions, and Form 1099-S

Using a home office deduction you usually take a depreciation deduction and in the year of sale all depreciation allowed or allowable must be recaptured.  Seek local professional guidance on this matter since if you got a 1099-S you must address this on the tax return in some fashion.

Carl
Level 15

Selling your home, home office deductions, and Form 1099-S

When you claim a home office, you are required to take depreciation based on the square foot percentage of your home claimed as such. (This changed in 2013, covered below.)  When you sell the property you are required to recapture and pay taxes on all depreciation taken. Even if you qualify for the "2 of last 5" capital gains tax exclusion, the recaptured depreciation is still taxable and is added to your AGI in the year you sell the property.  So if you claimed a home office, or any other business use of your home (such as renting out a room) it's common for the 1099-S to be issued to the seller.

Beginning in the 2013 tax year, businesses claiming a home office had/have the option of taking a "standard deduction" of $5 per square foot of space claimed for a home office, up to a maximum of 300 square feet. With this option, no other office expenses can be claimed. Additionally, no depreciation recapture is required. This is referred to as the "Simplified Option" for the home office deduction. For greater detail and a comparison between the two options, see https://www.irs.gov/businesses/small-businesses-self-employed/simplified-option-for-home-office-dedu...

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