What are the pros and cons for claiming a home office deduction - especially when you sell your home in Washington State?

[johnmich-]

I am self-employed.  I don't have an office anywhere else.  I do not see clients in my home, but I conduct all business transactions from home except when I am face-to-face with my client.

[Carl]

Basically, you will report that home office as "closed" on the date you moved out of the property at the latest. Then if you purchased a new home you would open a completely new home office in the new digs. The open date for the new home office can not be the same as or overlap the close date of the old office, and it can't be before the day you moved in. In the end, you would be reporting two home offices on the 2018 tax return. The old one you closed, and the new one you opened. So long as the close/open dates are not the same date and don't overlap, it's no big deal.

[johnmich-]

Thank you Carl.  I'm trying to understand the tax implications for claiming a home office deduction for X years and how that will affect me when I sell my house whether or not I open another office in the next home.  Do I lose money in the long run?  Am I penalized in some way?

[Carl]

Basically on the old house you sold, you must recapture all depreciation taken on the home office and pay tax on it. That recaptured depreciation is *NOT* exempt from being taxed, even if you qualify for the capital gains tax exclusion. No matter what, you *WILL* pay tax on that recaptured depreciation.
When reporting the home sale you will be asked something akin to "did you have any business use" of the home during the time you owned it. You will of course, answer this yes and then it will work you through the depreciation recapture. So when closing the old home office, pay attention to detail and write down all the depreciation numbers, because you *WILL* need them when reporting the sale.

[Anonymous]

Requirements to Claim the Home Office Deduction

Regardless of the method chosen (there is a safe harbor method vs proration of expenses), there are two basic requirements for your home to qualify as a deduction:

Regular and exclusive use.

Principal place of your business.

Regular and Exclusive Use.

You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.  If you use the same area for non-business purposes it doesn't qualify. (say to pay your personal bills, to sleep, etc).  

Principal Place of Your Business.

You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.

For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business.

You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.

Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.