If you plan on selling your home, you might assume you won’t have to pay tax on the profit. Usually that’s a fair assumption considering the generous $250,000 ($500,000 if a joint return is filed) exclusion-of-gain tax break on the sale of a principal residence. However, when you have a home office, or have taken the home office deduction in the past, you may have an extra bit of planning to do in order to guarantee the full benefit of the exclusion.

Fortunately, the IRS recently simplified complicated rules for those taxpayers who have a home office and take depreciation deductions. Prior to issuing corrective regulations in December 2002, the IRS required that, if you used your residence for both personal and business purposes, you would be treated as having sold two separate properties for purposes of using the home sale gain exclusion—a personal residence and a business building. The profit you realized on the sale of your home would be entitled to the $250,000 or $500,000 exclusion, but any profit on the sale of the business part of your property would be taxed.

The new rules no longer require most taxpayers who claim the home office deduction to allocate gain between business and residential portions of their home if the business use occurred within the same dwelling unit as the residential use. Now, the amount of depreciation you deducted as a home office expense is the only portion reportable as taxable gain.

For example, assume you used a spare room exclusively as a home office. The spare room occupies one-twelfth of your home and you took $10,000 in depreciation for that room over the years. Assume further that you purchased your home for $240,000 and just sold it for $600,000. Before the new IRS rules, one-twelfth of the sale, or $50,000, would be attributable to the business portion, with a tax basis of $10,000, generating a $40,000 taxable gain. Now, more of your profit may be covered by the $250,000 or $500,000 exclusion. Under the new rules, only the $10,000 of your former depreciation deductions are taxed, while the rest of your profit, $360,000, would all be tax-free.

If you have plans to move or set up your home office in a separate structure, however, you need to think carefully about the tax implications. In cases where your home office is not in the same building in which you reside, the old rules continue to apply and you may find that you’ll lose out on a significant portion of your home sale exclusion when it comes time to sell.