Are Some of the
Proceeds on the Sale of Your Residence Taxable?
If you used your home
for business you may have taxable gain.
In 1997, the tax
laws changed allowing you to exclude the gain on the sale of your
principal residence from tax. For most taxpayers, gain of up to $250,000
($500,000 if a joint return is filed) is free from tax. The general rule
states that if you own and occupy your residence in two of any of the five
years preceding the date of sale, you may qualify for this exclusion in
your tax preparation.
However, if you
use any part of your home for business purposes, some of your gain on your
home sale may be
taxable. If you claimed any depreciation on your home after May 6, 1997,
as a result of the business use, that portion of the gain will be taxable.
The IRS calls this "recapture" of the tax benefit you received by claiming
the depreciation business expense tax deduction. Business use of your home can
include use as a home office, rental use, or use as a day care center.
is important to note that if you have used your home for any type of
business, you must account for the depreciation during tax preparation. If you did not claim
depreciation, there is a rule that states depreciation is "allowed or
allowable." This means that even though you may not have claimed
depreciation for the business use portion on your tax return, the IRS is
going to assume you did, and the amount of the depreciation deductions
allowed or allowable will be recaptured as taxable income in the year of
your home sale.