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These days, more and more people are
working from home. If you own a home-based business or professional
practice, you may be able to deduct various expenses related to using
your home for business purposes. To qualify for a "home office"
deduction, you must meet certain tax law requirements.
For
Business Use Only
Deductions for an office in the home generally are available only if you
use the space regularly and exclusively for business. The exclusive-use
requirement can be especially hard to meet when your workplace is as
close as your loft or spare room. However, the IRS won't allow a
deduction if the office occasionally doubles as a den or guest room —
even if you use the space strictly for business during the workday.
What
Kinds of Expenses Are Deductible?
After
you've determined that you qualify for the deduction, the next step is
to keep track of your deductible expenses. These include various
expenses that relate to your entire home, such as electricity,
heating/cooling, homeowners insurance, and trash removal. Most commonly,
the deductible portion of each expense is figured by multiplying the
total amount paid by the ratio of the office's square footage to the
square footage of your entire home. You also may deduct expenses that
relate only to the office, such as carpet cleaning and depreciation.
Potential Tax Trap
Although
the home office deduction can help lower your taxes, it does carry a
potential cost. Ordinarily, if you make a profit when you sell your
home, you may exclude up to $250,000 of the capital gain ($500,000 if
filing jointly) from your income, assuming you have owned and used the
home as your principal residence for at least two of the five years
before the sale. When you have a home office, however, the tax rules say
that you can't exclude capital gain up to the amount of prior
depreciation for periods after May 6, 1997. The gain attributable to
that depreciation is currently taxed at a maximum rate of 25%. Any
additional gain can qualify for the exclusion.
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