This is an area that many people disregard only to be rudely awakened at tax time, well after their transaction is old and cold. Prior home office deductions including depreciation can return to create a tax obligation unless the business portion of the property is handled as a Section 1031 Exchange. Operating a home office inside your personal residence has very distinct tax advantages, however, upon the sale of the personal residence, the home office has to be accounted for as a mixed use property. It can be partly protected under Section 121(home residence exclusion of $250,000/ $500,000) and the business portion can also be protected if that portion is handled by a Qualified Intermediary. Most clients will use the proceeds to acquire the portion of their new residence that will be used for business purposes but it can be used to acquire other business or investment property. Don’t let this sleeping giant upset your home sale!
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