Sold home in 2024 that I also had a business in that closed 2019. Filed Schedule C and Form 8829 in past

[Happy24]

Suppose you had a small business you conducted out of your home.  You filed a Schedule C and a Form 8829 – Expenses for Business Use of Your Home, which allow a small deduction for depreciation of your home. 

2019 was the last year you did that business in your home.

Now it’s 2024 and the home is sold.   The sale price was under $500,000 which would normally mean there are no tax implications that would need to be considered because it’s under the married threshold for taxability. 

BUT you had this business in your home until 2019 and you did get some depreciation benefits from that, so must you pay capital gains tax on the portion of your home sale profit equal to that amount of depreciation?  So, the recaptured deductions are taxed at the individuals tax rate, which for this person would be 12%. 

Or is Form 8829 considered the simplified deduction method that allows you to calculate your deduction based on the square footage of your business rather than individual expenses, depreciation is treated as zero and you owe no additional tax for this.

I was looking at Publication 523 and with the all and’s and or’s it’s just a bit confusing.  So thought I would reach out and see what’s what.   Thanks for your input.

[tagteam]

See https://www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals/depreciation-recapture/depre...

[Happy24]

So getting back to my original question.  I don't believe the simplified deduction is the method I should use and I think cap gains will need to be calculated.  So is the approach that easy that I just add up all the depreciation that was taken for the house during the time the business was going on and pay the tax on that or do I need to fill out the worksheets in publication 523 figuring the amount of the sale of the house minus the original cost paid years ago.   Or am I making too much out of this?   

[tagteam]

Is this a hypothetical?

If you use the simplified method, you do not need to recapture.

Otherwise, the accumulated depreciation is recaptured (i.e., taxed as ordinary income up to a cap of 25%).

[Happy24]

Not hypothetical.   My mother-in-law sold her house.   She had one room in her home she used to do massages for a couple of years.   She stopped in 2019.   I'm not sure when she started it (and neither is she), but I have worked with her and her taxes since 2008 and I do have Form 8829 that shows me the depreciation that was taken up until 2019 when she stopped doing the massages.   BTW thanks for the quick response.   I was hoping to get this resolved in case we need to make an estimated payment by 9/15.

[tagteam · Accepted solution]

So, you simply need to enter the accumulated depreciation figure into the program.

It appears as if you're good to go.

[Happy24]

Thanks for your help with the depreciation question.   So, then for the sale of the home part of this question.   Do I need the settlement sheet from the original purchase (which I don't think she has) for any reason or can I just put in that house was bought at $159,800 and then sold in June for $405,800 and since she is married, they are under the $500,000 limit.  

[tagteam]

Did the spouse use it as a primary residence for the last two out of five years leading up to the closing (i.e., does the spouse also qualify for the exclusion)?

See https://www.irs.gov/publications/p523#en_US_2023_publink10008938

[tagteam]

You also should have some sort of documentation as to the cost basis of the house, whether that is a closing statement, or something similar thereto.

[Happy24]

yes.  they both lived there since 3/26/91.

[Happy24]

I do have a closing statement and a Form 1099-S for the sale in June

[tagteam]

For the sale, but you need to know the cost basis.

If you have no closing statement (e.g., HUD-1 at the time), there should be a public record of the transaction.

[Happy24]

We have been filling out Form 8829 and down in Part III Line 37 - Home's adjusted basis or FMV, we put in $159,800 and Line 38 - Value of land was $45,000.  Line 39 Basis of building = $114,800.   We have used those numbers since she started her massage business.  

[tagteam]

You have no documentation as to what she might have paid for the property?

[Happy24]

She says she can't find the original purchase agreement (closing statement/1099-S. )  I think you mentioned that we could look it up through court house records.   But I'm wondering if we have used that $159,800 for so many years on the Form 8829, couldn't we take that as the cost basis?

And does it further complicate things if we took a Residential Energy Credit in 2011?   LOL   This is a nightmare!