Welcome to show 58 of The Tax Answers Advisor with Marcelino Dodge Enrolled Agent certainly appreciate all the wonderful listeners around the world who download
this podcast throughout the United States, Europe and Asia. Such a joy to have
such a diverse audience, really appreciate that. Also, keep in mind that this
video that is talking about home office, the deductibility of a home office
today, will be posted later on to the Cash Tracks Financial YouTube
page. And please subscribe to that page all are invited to schedule a mutual
exploration session with me Marcelino Dodge, I work with taxpayers all over the
country to help them whether they're an individual or they're a business to pay
as little tax as possible within the tax law and maybe even try to help you to
increase wealth right along the way, we have a lot of good tax planning
services available. And we'll work with you year-around, you can always contact
me through email, which is success@cashtracksfinancial.com Or give a call directly to the
office here, which is 844-394-4287. Visit us at www.cashtracksfinancial.com.
And you can actually schedule a virtual online appointment
right through the website. And as I
mentioned a moment ago, our topic today is going to be the home office, is the
home office deduction? And if you sell your home later on, what effect does
this have on the sale of the home, we're going to take a look at some of those
circumstances today. Because these are important to consider for if you're a
remote worker, on ally, or if you're with virtual five o'clock, one of those
kinds of areas or one another group that perhaps does a lot of work from home,
you need to understand exactly what kind of deductions can I take? Is your tax
professional helping you to know about what deductions are available? And even
if you can take any of these deductions. So, I'm gonna go in, and I'm gonna
discuss these today with you to help you to be able to really understand these
as well. And so, what makes it possible for one to be able to take deductions
on the home? Well, it depends on all the facts and circumstances involved, just
like many, many areas with the IRS, everything depends on facts and
circumstances.
And this is very important to consider because many companies
we see have gone virtual over the last two years with the pandemic. And some,
some are having their employees work from home. Other people have been starting
businesses, a lot of different home-based businesses, and doing a lot of just
entrepreneurs happening. So, we got to really understand what can we deduct? Or
can we reject deductions in our home. As I mentioned, there's a lot of
home-based businesses there you got daycare providers, which are in some areas
are opening up, they have deductions that they can take, which are a little bit
different than other home office deductions. That can be a whole discussion on
its own. If you're a contractor of some sort, and you've got a home office, how
much can you take, you have consultants, you have direct sellers, all of these
areas are affected by a home office and can have deductions there that they may
not be aware of.
Also, if you have an office in your home, what travel from
your home is deductible, is travel from your home deductible? you're going to
have different opinions on this depending on the tax professional, I have
encountered this area where some have just not allowed certain travel from the
home others have. Well, we're going to take a look and see exactly what the IRS
says because there are certain exceptions for certain circumstances in there.
Now what vehicle expenses can I deduct? Once again, it comes into our we're
looking at mileage or we're looking at actual expenses. When can we take those
what is required to do so we're going to take a brief look at? that I have a
whole another podcast. It just talks about what kind of expenses you can deduct
on a business vehicle. And that gets rather extensive on there. We'll probably
have another one coming up here again, in the near future as well.
We got to keep in mind that the tax cut and Jobs Act of 2017
also made some adjustments to the rules that had been in place for several
years. This has been since the 2018 tax years that unreimbursed employee
business deductions have been greatly reduced on to the tax cut and Jobs Act of
2017, just a few different areas that we're going to cover today. So, what
we're going to first of all start off with is, are you, where's your tax, when
we step back here, where is your tax home, or what is a tax home? That's a very
important consideration when we look at home office because we need to really
understand what a tax will miss. And it's looked at as the regular place of
business, or where you're posted, where your duty is. And this is actually
regardless of where you live. So, you could live like for example, in I'll just
use in Colorado areas here. And you could actually live in Colorado Springs.
And this is actually happens, a lot of people live like in
Colorado Springs, but actually work in Denver, and that's where their regular
place of business is, is in Denver. So that could be their tax home, their
general area. Now, if you're working from your home, and your offices in your
home, and your main businesses in your home, and you do all your business in
one bigger general area, like Colorado Springs, for example, then that could
very well be your tax home because that's where your business or your work is
located. And so, as we take a look here at this, we got to consider a big
question, which is, are you self-employed? Or are you a contractor? Do you
basically work for yourself? The reason this question is so important, because
when it comes to taking an office in the home, under current law, it makes a
humongous, just a huge difference as to whether you can actually take it or
not.
And so, because, as I mentioned earlier, the tax cuts and
Jobs Act made a huge adjustment to the rules regarding office in the home and
particular for employees. So, if you're getting a W-2, then there are no
unreimbursed employee business expenses at this time. Now if the loss is
scheduled to in a few years, those may come back, but we're gonna kind of see
what happens over the next few years in the climate and see, we see if Congress
makes any adjustments to the tax cuts and Jobs Act. So, we're going to take a
look, though, mainly today as we go into this on a taxpayer using the home for
business. And this will be actually looking closely at the self-employed
taxpayer who they are, are they actually conducting business, is the taxpayer
having a spot in the home that they are using for business purposes.
Now as we look at the home for business, this can actually
include a sole proprietor, which when you're talking about a sole proprietor
that can also include someone who is operating a business as a single person,
LLC, because those are taxed as sole proprietors unless they make a different
tax election. Now, this could also perhaps be a statutory employee, one who
essentially gets a W-2 but has that little box checked on their W-2 that hasn't
as a statutory employee, I've done a few of these individuals over the years.
And with the tax cut and Jobs Act, some employers actually made that
adjustment. So that there because there are definitions for statutory employee
that have to be met. But once those are met, then a statutory employee can actually
take an office in the home, then you look up farmer, if you're a farmer,
there's a way that can be done as well taken off this in the home deduction.
And then if you're a partner in a partnership, there's a certain way that can
be done as well.
So, we're gonna kind of take a broad look at this today.
Because really, to sit through this information I'm going to provide is going
to be good, but you really need to get with a tax professional and help you to
really sort through this information. But hopefully, I can give you some good
basic understanding of that today. Many entrepreneurs as I talked about,
they're starting businesses, they're operating businesses from their home,
sadly, though, they're doing so but they're not always talking to a tax professional
before they do it. And so many people go and do this, which is what I've highly
recommended through the podcast on numerous occasions is, if you're even have
an inkling of starting a business, it's vital to talk to a tax professional
about that. That way you don't get hit with those taxes later on down the road
or talking to a tax professional as soon as you possibly can after you do it.
Or even really, it's best before you start that way, you know
what kind of entity, you're going to have whether you're going to be a sole
proprietor and know what the tax consequences are. And if you're going to be an
LLC or a corporation, all of those are important to consider. So, if you're not
looking to starting a business or if you have started the business, it's vital
that you get with your tax professional to understand what is, what the tax
rate applications are going to be, and now is an excellent time to be doing
that here in the middle of the year. So, if you're operating from your home
with an office, and that's your sole place of business, that's one requirement,
you got to have it as your sole place of business basically operating there you
could be, if you're operating as a contractor, setting up various jobs doing
from your home, then you go out and you perform the building, or remodeling.
But your sole place of business is in your home, that
certainly counts. Also, an important consideration when
you're looking for business or an office in the home deduction is it cannot be
added to a loss. So basically, if you make, after you take all of your other
expenses, including depreciation, if your net profit after all of your expenses
is zero, for example, and say you have $1,000 office in the home deduction, you
can't take that deduction, it cannot put you into a loss or if your business is
already in like a negative $2000. Because all the other expenses, you cannot
take the office in the home deduction. So, this comes in handy when you're
calculating and you have a profit gone. But it cannot be taken if you have a
loss, or you cannot take it all if there's not enough profit, to be able to odd
to use up all the office in the home deduction.
But if you're doing the office in the home through the
calculations on the form, you could have a carryover into the next year that
can actually help you in the next year. So, there are some benefits there. Now,
as I mentioned it, there's actual expenses, which I just touched on a little
bit through the proper form, the actual expenses where you calculate actual
expenses for a home office deduction, or an option is to take the Safe Harbor,
we're going to talk a little bit more about the safe harbor in a little bit.
But that's the two ways you have you have actual expenses, and you have a safe
harbor. So then, what though, can qualify us to be able to even take a home
office deduction, while we got to meet the test, it's like everything else with
the IRS, there's certain tests, certain requirements, certain areas that have
to be met in order to meet the qualification or, as I like to put in my deal
here, boxes to check. And once we check all those boxes, then you can take the
deduction.
Now, there is an exclusive use test, which what this means is
the fact that you have a 10 by 10 area in your home, that has a desk that has an
area and all, the only use for that area is for business purposes. That's not
an area where you go in and you go play games later on the computer, or you go
in and take care of other personal matters there. But that is an exclusive
business area. And that is one area that some people get caught on when they
get audited when it comes to office in the home is that they, they don't pass
the exclusive use tests because they do so many other personal tasks. They're
in addition to business, but it has to be exclusive for business use to be able
to take that deduction. Now, there are some if there is an exception of an area
that you perhaps use to store inventory, and product samples. Some people who
are like direct sellers will order in some various products; they'll have them
there. They're on shelves that they store them on for purposes of selling at a
later date.
So, they have a little bit of an inventory. Now that storage
area that's used there, whatever that square footage of that storage area that
can be used for a home office deduction. So that's a good little area to know. So,
if you're in one of those areas, doing some direct selling, and have some
products on your shelves, whether it be like some type of supplements or
whatever the case may be which supplements are one of the common ones I see is
that you can take that office deduction there. Now the one exception, other
exception to the exclusive use test is if you are using your home for a
daycare, there's a whole set of rules that goes in with daycare and use of the
home. Once again you do some square footage calculations and you do some other
calculations all in there. But you do not have to meet the use as exclusive use
for a daycare because there's going to be parts of the home when you use a daycare.
That's going to have a non-exclusive use. But that's a whole another
discussion just on daycare but be aware if you are running a daycare, you do
not need to meet the exclusive use test. Another test that is the regular use
test. So, this must be an area that you use regularly for certain type of
activities regarding to visit and you regularly use, it's not necessarily a set
number of hours, but it is in regular use, it's not something that you just
kind of use a couple times a year, but it's something that has some type of
regular use probably a few times during the week where you're regularly there
taking care of paperwork, maybe sending out invoices, adding a payment, so on. So,
you got to have that regular news, as well as you have to be in a legitimate
trade or business use. So, we're talking here, trade or business use vitally
important to be able to do that. So that yes, being in a trade or business of
some sort allows you to take this office in the home deduction. But what is
principal place of business, let's look at that just a little bit more here.
Because in order to be able to, once again, take this office in the home
deduction, got to have a principal place of business.
Now, some people because of the way they're doing business,
we got online businesses and so on, their principal place of business isn't the
normal like brick-and-mortar store, where a retail store where people will come
in and purchase items, because of so many people, so many of us are selling
items online through various marketplaces. So, your principal place of
business, once again, could very well, be your home, could be your home office.
And so, there's an exclusive, there's an exclusivity and admin test that needs
to be met. So, are you doing regular activities to manage your business in this
location? that would certainly qualify it as a principal place of business. And,
once again, if you're like a contractor, you're going outside of there, but
you're at your place in your home, your home office, and you're writing out
estimates, you're making out statements, invoices, sending those out to people,
that's exclusive regular admin use. And there's a lot of other activities that
fit into that.
And certainly, if we need to have that discussion, and you
can have that with me, in one of our exploration sessions, we can certainly
have that, and there's no other activity. So basically, it comes down to, you
may have a, you can have maybe another place where you store materials, which
isn't necessarily at your home, but you don't do any administrative activities
there. But you do all of your management activities at your home. Now, an
interesting part about this is that some people, some entrepreneurs even have
more than one type of business. But you can use, as long as you're using that
home office only for business. It still counts. So even if it's one more than
one business, once again, keep in mind that this home office, as long as it's
used for business purposes can be used only for just business and but more than
one business. Now also keep in mind, as you have this particular setup here.
This is not required to meet people, some people, some people
do choose to meet clients or individuals in their homes, in their home office.
Well, it's certainly not a requirement. So, if you have, if you're like some
type of consultant, or you're in the medical field, or you're even in the tax
field like I am, and you decide to have an office in your home, you don't have
to meet your patients or clients or your customers in your home. To qualify as
a home office. As long as it's your regular pace of business. If you're there
at the home office. And you regularly schedule appointments, and you radially
do administrative tasks, then you make the appointment and then you go out to
the individual's home or their place or you meet him in a business meeting that
doesn't pull away from your office in the home. Because you're going out and
meeting him. But you're taking care of administrative tasks, you're taking care
of a lot of tasks, though, that are really, really important.
So, you just keep on working at that and keep doing what you
can. And keep in mind that once again, you do not need to be meeting patients,
clients or customers. Now can it be a separate structure? Yeah, you can have a
separate structure at your home as well. And doesn't necessarily have to be
attached to your home. But it can be a separate structure that is perhaps
detached and I haven't encountered this as well where some people have like
their big home but then they have a nice little building off to the side. Where
what they do is they have like their beauty shop and there I've seen that one
Wherever they have storage for their business, or I've had one client who
actually had their like, did their little tattoo business, in a separate
structure? Yes. Now it still can be considered a home office, because over all
the property and all of those areas, so then, what can we do then? How do we
take how do we calculate the deduction? What do we do? Well, we can take actual
expenses.
Or, as I mentioned earlier, we can do a safe harbor, what is
the safe harbor? Well, this is, once you calculate the square footage that
you're going to use, you're going to then, so if you have like a 300 square
feet area that you're using, you get $5 per square feet, that's the maximum
amount of square footage you can take on the safe harbor is 300 square feet. So
basically, the maximum deduction under the Safe Harbor is $1,500. So then, what
we go in and do is we just put that in there a good part about that is, is that
it's not auditable, you're not going to be checked on that. But once again, you
still have the limitation on the Safe Harbor, that cannot be greater than
whatever business income is. Now, also, if you use the safe harbor, and you've
been using it, there's no carryover.
So yes, if you do have a loss, but you have the home office,
but you use the Safe Harbor, you're not going to carry that over into the next
year. So that's where the actual expense does have an advantage is that it does
carry over in the years that you're not able to fully utilize it. So then
actual expenses come in on the office in the home, what are these actual
expenses, while there's two types, there's direct expenses, which those are
expenses that only apply directly to the office in the home. That's, that can
be repairs to the area, that can be certain changes to the area, that is a
number of different areas that all fall in there. So, we just got to keep in
mind that direct, I haven't encountered a lot direct, but I do see some direct
expenses on occasion, or ones make specific changes or specific adjustments to
the area where they have their office in the home. Now another area that I
mentioned, that is very common that I deal with quite a bit is indirect
expenses.
Wow, indirect, what exactly is an indirect expense, this is
an expense that is basically used on the entire home. And is then categorized
or actually then calculated. What percentage of that use then is for the home
office? And that's where the square footage comes in. Sometimes people come in
and says, why spent this much this much and this much on it. And they're
talking about the utilities, you're talking about their insurance, general
repairs, mortgage interest, all of those areas. But yet, sometimes, in many
times, at least I've encountered with many people I work with, is that I have
to go back and ask, okay, what is the square footage of the home? And the kind
of give me that look like, Huh? I don't know, why says why we need the square
footage of the home.
And then we also need the square footage of the place that
you are using as your home office that you are exclusively using as your home
office, we have to have that in order to make a calculation. So, we'll take up,
we'll get the utilities, we'll get the insurance, general repairs, mortgage
insurance, property taxes, all of those areas. And then we take a percentage of
that based on how what percentage of the house is used for business purposes.
So that's where we have to have the total square footage of the home, we have
to have the square footage of the area being exclusively used. And then based
on that a percentage is developed as to how much of all the indirect expenses
that we can take as a deduction. Now what makes this really nice for self-employed
individuals that have their business in their home, is that allows you to take
items such as your mortgage insurance, and your property taxes as a deduction,
which for most people today, they're not able to take those as deductions
because of the way the standard deduction was raised in the tax cuts and Jobs
Act.
But now you can take some of those, part of those as a deduction
for your office in your home. And that's a very good very good piece of
knowledge to know that you can do. But as you got to meet all of those tests
that I mentioned earlier, you have to have exclusive use and exclusive use, you
have to have regular use, you have to have trade or business use test, you have
to meet all of those to be able to use the office in the home to use whether
the direct expenses or the indirect expenses. Now, if you do happen to meet
other qualifications to do itemized deductions with your tax return, then
whatever you did not take as a deduction for your office in the home, for your
property taxes or for your mortgage interest, you can then possibly take as
part of an itemized deduction.
So that's also good to keep in mind and good to know if you
qualify for those areas. Another expense that is sometimes often overlooked
when it comes to office in the home is depreciation, yes, when you take an
office in the home, you got to take depreciation and the poor that portion of
your home. So, if you got a 1500 square foot home, for example, and you're
using 300 square feet, exclusively for business, that 300 square feet, is
treated as a 39-year nonresidential property which basically means you got to
we got to take the value of the home, when you start using it, another
percentage we got to calculate. And then we take that calculation that comes in
depreciation, so you get a depreciation deduction as well included with your
office in the home deduction.
I mentioned a little bit ago as well, that when I started
this, that we take an office in the home deduction, it can also affect what
happens when you sell your home and you're like, Okay, I'm selling my home. And
I've taken this office in the home deduction for whatever few years and I've
had the depreciation. But wait a minute. Now, I got to think about this when
I'm selling my home. Well, according to IRS regulations, yes, you do need to do
that. So, what does it mean? I'm selling my home? I've used it for business
purposes. Am I going to pay taxes now on the sale of my home? Well, I can't
really answer the question yes or no, because it all varies based on facts and
circumstances, as I mentioned earlier, so much in dealing with the IRS is all
about facts and circumstances.
So, let's take a look. Now we've covered about Office in your
home, what does it take to qualify? What kind of expenses can I take? But now,
you've been working in your home, and you're deciding, oh, it's time to move
on. So, I'm gonna go ahead and sell my home. You may be asking or thinking
about well, isn't there some type of exclusion I get? Well, yes, there is some
type of exclusion on game that you receive. But since I've used it in, I've
used an office in the home deduction. It does adjust that. So then, many times
I get this question, people selling my home, I'm selling my home, how much tax
am I going to pay? Well, my question then, is always well, we need more
information.
That's all what I'm going to always tell people, I need more
information. I can't tell you if you're going to pay tax if you're not going to
pay tax on the selling of your home, because there are a lot of facts and
circumstances that play into it. That's always my reasoning is facts and
circumstances, we have to know what is happening with that? Well, let's take a
look. Take a few steps back here. And I'm gonna come back and talk and address
this part that I mentioned earlier, about how does using the office in the home
come back and affect the sale of the of the personal residence. When you go and
sell your home, depending on the title company, you could either receive the
date you sell it, or at the end of the year, you could receive a form 1099-S
and it really depends on the title company.
I've seen different circumstances;
different title companies do different things. They only issue amount of if the
amounts are certain or a certain amount. So, they really depend, but if you do
get a form 1099-S So be aware that you do need to include that on your tax
return. Otherwise, once again, you get six months a year later, you'll get this
nice letter from the IRS saying guess what, you didn't claim this or you didn't
report this so Oh, by the way, you sold this home; you were given
$300,000. So, you need to pay US tax on this $300,000 that you received on the
sale of this home and you're like, whoa, wait a minute. I didn't get that whole
$3,000, $250,000 of that went to go pay the bank off. So why am I going to do
this, and then you come and see me a tax professional and we fix it. So, it's
just be aware, if you see that form, you've got to get it included with your
taxes.
Although sometimes in
the taxpayers’ defense, I will say that sometimes you don't get the form, but
when it's still filed, because that has happened as well, but either way you
still got something that has to be fixed and can be fixed. Now if you do happen
to be foreclosed on, or if your home has been repossessed, you still may get a
1099-S because it's treated as a sale of your home. So, keep that in mind, just
don't brush it off. But make sure you that has to be filed. And which is which
in those circumstances is not always a pretty thing. But still, you can have
tax ramifications if you do not file the tax return. Or you make sure you
include the 1099-S on the tax return, because there's still a possibility you
may get one even on a foreclosure or repossession. Let's now take a look at
when we look at selling your home, you got to first of all calculate the basis
in your home, basis, and we're back to this word basis again. Yep, we got to
have a basis in your home.
So, which comes in to purchase price, what did you purchase
for? So, if you purchased versus afford $250,000? How much did you pay in
closing costs? That's why I need to know when that's happening, it's always
good. As a tax professional, I always ask for the closing documents. When you
purchase the home, they're good. So, any more what I'm going to work on doing
myself personally is if I have a client buy a home, I'm going to invite them or
ask them Okay, can you please bring me a copy of those closing documents. So,
we can put that in the file, keep that in the file so that if you do sell the
home in the future, we have a, we have a basis determination for you. Some people
perhaps build their home where they personally contract at home out? Well, that
you have land labor materials, legal fees, permit, utility connections, all of
these then add into the basis of the home in helping to establish that.
And once again, what are we establishing basis for what we're
establishing bases? The purpose is to help us to be able to know if we have any
profit on the home at a later date. So, what is the purchase price while we got
back the purchase price, so then we've covered purchase price, we've covered self-build.
Now what if you inherited the home? What's your basis there? Here it is the
fair market value at the date of death. So, but once again, we're looking at
personal residence here, we're not talking about just inherited, so you
inherited the home and you actually moved into the home, as well. It's what
we're talking about here. So, inherited. So that's fair market value data that
was given to me, well, the home could have been given to you. And that happens
like homes are gifted to children.
So, as I mentioned, it's the lore of the basis that the
grantor had or the person that gave the gift, it's the lore of what their basis
is or the market or the fair market value at the date of death. So, on a gift,
it can be very, very hard to determine in some cases what the basis is. But if
someone just gifted you a home and say they paid $25,000, for it 20 years ago, essentially,
they gifted to you, that's what your basis is going to be in that home is $25,000.
Now, once again, we're talking about some areas here, we're gonna get into the
exceptions with this. But what I'm mentioning is that it's important to know
this information. So, if you ever do it, if you've got a gift, and we're
talking about selling a home and you move into the home, and it is your primary
residence once again, that's when I want to mention we're talking about your
primary residence where you're living, these are all still important numbers to
know.
So how about additional rules in a community property state?
I'm not going to get into those. But those there are some additional rules that
fall in on those calculations if you're in a community property state. So those
probably need to be looked at a little bit closer. So, then what do we
calculate when we're going to look in to a gain or loss? Well, first step is
when we sell the home, we have to look at how much did I sell it for? And I
sell it for $500,000 Okay, how much did it cost me to sell it? Well, I got
Commission's perhaps paid to a realtor, I got other expenses. Once again,
closing documents are needed to really see what those selling expenses are. So,
then you can know really know well, how much and I actually realized, now
selling one thing keep in mind, the amount paid to the bank, for a mortgage is
not a selling expense. It's just paying off the mortgage.
So just please keep that in mind. Now after you get what the
amount realized is and you got your basis, then you can determine Okay, do I
have a gain on this? Or do I have a loss? Well, let's hit this right off right
up front. If there's a loss, the loss is not a deductible expense. But if you
have a gain, you may have a taxable event, which is why we're talking about
this because if you have a gain is any of the gain excludable why while if it's
your primary residence, possibly some of it could be excludable how much, wow $250,000
per taxpayer of profit, or $500,000, for a joint return, those are the amounts
that could possibly be excluded. But what is needed, what is required for those
to be excluded? Wow, there's three tests that you need to meet to be able to
qualify for this.
First is ownership, you need to own the home for two out of
the last five years. And what's nice about this is that this test is met if
either spouse meets the ownership test of this, which basically helps us to see
that if there's a marriage that occurs in there, and one of them, one of those
individuals in the new marriage meets the test, you their use test. Two out of
the last five years did you live in the home at least two out of the last five
years. Now in this case, both of the individuals must meet this use test if you
have a jointly filed tax return. Here's an interesting part exclusion test. So,
in the exclusion test, you must not have excluded any other gain in the prior
two years. So yes, you can only do this like every two years, but you got to
live in I mean, this two-year rule is pretty, pretty straightforward. So yes,
remember, you got to own it for at least two to two out of the last five, use
it for at least two out of the last five and not have excluded any other than
any other exclusion in the last two years. That's both most spouses in the case
of a jointly filed tax return.
Now here's a warning to keep in mind. If you've had a spouse
pass away, in the last two years, while a spouse passed away, we refresh that
you can you can get the exclusion. Still, if you sell the if you sell the place
sell the home no later than two years after the death. And the surviving spouse
does not remarry before the sale. So basically, this is a planning thing. If
your spouse dies, and you're getting down the road, you're trying to remarry,
and you still have the home, but you're gonna sell that, make sure you have it
sold before you remarry. That way you get the exclusion and not have to pay the
tax on it. Now, I also really liked this part here, the two-year rule. And I
mentioned for ownership use test exclusion test, that does not have to be two
years, or 24 months, continuously.
As long as within the five years you meet the two-year rule.
So basically, what that helps us to see is that you can live in the property,
have the owner have the ownership test and the use test, you can live in the
property, I would mainly mean say this with us test on myself is that you can
use the property as your personal residence for like one year, then skip a
year, then go back and use it another year as your primary residence a year and
a half. And then still get this exclusion, very interesting how that works. But
yeah, you definitely can do that. So basically, what this comes down to is that
you can exclude as an individual up to $250,000 of gain or capital gain on the
sale of a home and not pay any tax on a $250,000 or $500,000 on a jointly filed
return. Now if you're selling a home at the time, this is being broadcast and
being recorded. This could be very handy to know.
And very handy to do, especially with where home prices are. So,
keep just keep these points in mind there. If you're thinking about that and
make sure once again, you're looking for that 1099-S. But I did mention a
little bit earlier, what if the home was used for business purposes, or even a
rental before the sale. So once again, at least back to our home office
discussion we had a little bit earlier about why would I need to be concerned
with this when I sell my home? Well, if you use this home as a rental home
prior to using it as your personal residence or using it as your personal
residence and having a home office in the home. What you did on your tax return
is that you were to have taken depreciation on this. Now you still get the
exclusion you can still get the exclusion $250,000 or the $500,000 exclusion.
But you took depreciation on the home. Well, what does that
mean? Well, when you go to sell the home and this is true on items, when you
sell it with depreciation in general, is that what you need to do is and you
must then recapture that depreciation at the time of the sale. So there, so you
may have the exclusion, but then that depreciation that you took is going to
come back at the time of sale. So, you may pay tax on the appreciation. Now,
the good part as far as when you're looking at office in the home, for example,
the amount of depreciation usually is not that much. Maybe a few hundred
dollars a year or maybe even not $100, you're just really depending on facts
and circumstances. So, I wouldn't be too concerned about that. But just be
aware that, yes, that depreciation would need to be recaptured.
So, it could possibly add a little bit of tax at the time
when you sell a home that has been used for business purposes. So yes, we see
here as we've gone through today, on this, that yes, an office in the home can
be a very good thing, can be very convenient. You just got to meet the various
tests. The exclusivity test, the regular use test, the trader business use
tests, those tests have to be met. The biggest one, the biggest challenge
taxpayers have is the exclusive use test. So yes, as a sole proprietor, single
person, LLC, a farmer, a partner statutory employee, keep in mind, yes, you can
have an office in the home, have that designated spot, only use it for business
purposes. And then keep an accurate track of all of your expenses related to
the home, your insurance, your repairs, your mortgage, interest, your
utilities, insurance, everything, property taxes, make sure you have all of
those and you have to have minimized out if you're going to do an actual
expense, for the home office deduction so that all of that can be calculated,
make sure you have an accurate measurement of the square footage of your home
and the square footage that you are using for business purposes. That way, once
again, all that can be accurately calculated.
And then keep in mind as you sell your home, or you're
selling your primary residence, that you may need to recapture depreciation
that was taken while using the home perhaps as a rental, or using the home, the
office in the home deduction, you still get the $250,000 exclusion per taxpayer
of $500,000 on a joint return. But just keep thinking about the basis and
making sure that tracking helping your tax professional to do that, having
closing documents, all those items are very much important which is why, when I
work with individuals to try to help them always to do tax planning to have the
lowest tax possible. Now tax can be a good thing we just got we don't want to
pay any more than we're legally need to pay.
So, let's keep in mind that we want to review and plan
throughout the year. Right now, at the time of this recording. We're in the
month of July, July August. Good time. Let's take a look see where we are, it
is essential. Good plan for the year takes a year-round approach. Let's set
some goals work together. Let's look at your estimated payments. Let's look at
your withholding, do you need to make estimated payment or update your
estimated payments for the year.
We have virtual tax preparation that we do video interviews
works very well electronic signatures, secure web portal all of that is
available to you through cashtracksfinancial as I work with clients throughout
the country in different states and that's the great part about being an
enrolled agent is that I can offer though that level of service to you, the
taxpayer to help you to indeed pay as little tax as possible. Keep in mind that
you can reach me at 844-394-4287, also email me at success@cashtracksfinancial.com.
And of course, visit my website which is cashtracksfinancial.com. Cash Tracks Financial and Marcelino Dodge,Enrolled Agent work to keep tax time less taxing for you. I do indeed thank you
for your time today. It's been a real pleasure communicating this wonderful
information regarding home office deductions and the exclusion of primary
residence again on a primary residence. I look forward to talking to you again
soon. This is Marcelino Dodge, EnrolledAgent for The Tax Answers Advisor.
525 N Cascade Ave., Ste 200
Colorado Springs, CO 80903
(719) 359-8789
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