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Tax pitfall in home office deductions

by on
in Small Business Tax,Small Business Tax Deduction Strategies

Q. I’ve had a home office for several years. Do I owe any tax if I sell the home? A.L., Manhasset, N.Y.

A. Yes. Under a complicated set of rules, you must “recapture” the allowable depreciation deduction allowed for your home office, dating back deductions to May 6, 1997. You’re generally required to pay tax on the recaptured capital gain income at a maximum federal rate of 25% The recaptured gain isn’t eligible for the $250,000/$500,000 home sale gain exclusion. But you don’t have to recapture any other home office expenses.

Tip: Under the American Taxpayer Relief Act (ATRA), the maximum tax rate on long-term capital gain is 15% (20% for certain upper-income taxpayers), but ATRA didn’t change the 25% maximum rate for depreciation recapture.

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