Tax help: implications of removing a home office
April 3, 2018 11:56 PM Subscribe
Since moving into my co-op apartment (in the U.S.), I've used one room as a home office, and declared it as such on my taxes. Life-changes now mean I'm considering converting the home office into something else, but I haven't been able to find anything online about the tax implications of retiring a home office while still living in the same (owned) apartment.
If I "unconvert" the home office, obviously I'd stop taking a percentage of utilities, etc. as business expenses on my Schedule C, and I assume I'd stop depreciating the x% of apartment's purchase price each year, but how is this handled when I eventually sell the place?
My understanding is that *with* a home office, when selling you end up getting taxed on all the prior years' allowable depreciation (at a 25% rate, regardless of your current tax bracket). But how does this work if, say, you only used the home office for the first eight years, and converted it into a bedroom, etc. later?
Is there a mechanism for telling the IRS that the room is no longer used as a home office, thus stopping the clock on the "allowable depreciation" that would later be taxed upon selling? (Or do they recapture taxes on the earlier allowable depreciation the year you reconvert the office into a personal-use room?)
I've been doing my own taxes for the last few years (in TurboTax), and while I'd go find a new accountant if necessary, this seems like something I should be able to at least roughly figure out on my own, right? It doesn't seem like it should be such a unique situation, but my attempts at searching for an answer have been swamped exclusively with articles about converting a room *into* a home office.
I'm in NYC, in case that's relevant.
If I "unconvert" the home office, obviously I'd stop taking a percentage of utilities, etc. as business expenses on my Schedule C, and I assume I'd stop depreciating the x% of apartment's purchase price each year, but how is this handled when I eventually sell the place?
My understanding is that *with* a home office, when selling you end up getting taxed on all the prior years' allowable depreciation (at a 25% rate, regardless of your current tax bracket). But how does this work if, say, you only used the home office for the first eight years, and converted it into a bedroom, etc. later?
Is there a mechanism for telling the IRS that the room is no longer used as a home office, thus stopping the clock on the "allowable depreciation" that would later be taxed upon selling? (Or do they recapture taxes on the earlier allowable depreciation the year you reconvert the office into a personal-use room?)
I've been doing my own taxes for the last few years (in TurboTax), and while I'd go find a new accountant if necessary, this seems like something I should be able to at least roughly figure out on my own, right? It doesn't seem like it should be such a unique situation, but my attempts at searching for an answer have been swamped exclusively with articles about converting a room *into* a home office.
I'm in NYC, in case that's relevant.
From the IRS: "Decrease the basis of your property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you properly selected." So I think a reasonable interpretation is that you don't do anything special now, other than what you said was obvious, and keep copies of all the past returns that included the deductions so that you can accurately calculate the basis when you sell.
You could call the IRS, but their record of accuracy isn't great, and this is a relatively complex question. And not to be cavalier, but the chances of being audited are tiny, and I wouldn't worry about an audit, because you're clearly trying to do the right thing.
posted by Mr.Know-it-some at 6:28 AM on April 4, 2018 [2 favorites]
You could call the IRS, but their record of accuracy isn't great, and this is a relatively complex question. And not to be cavalier, but the chances of being audited are tiny, and I wouldn't worry about an audit, because you're clearly trying to do the right thing.
posted by Mr.Know-it-some at 6:28 AM on April 4, 2018 [2 favorites]
I vaguely recall in my research a year ago on this issue that worries about the tax implications of declaring a home office only really relate to properties that sell for a certain amount of profit. And it was a sum that seemed impossibly large to me. Of course, you're in NYC so maybe that could be significant. Next year, on your taxes, you'll show no home office deduction or other business deductions related to a home office. That is evidence and it seems that would be sufficient for tax purposes. Really, though, because every situation has unique elements to it. I think you should make note, in May, to ask for a consultation with a local accountant. It shouldn't cost too much to ask this question and get some advice and could potentially save you thousands. You'll rest easier knowing that it is advice relevant to your situation and concerns and your locality.
posted by amanda at 3:20 PM on April 4, 2018
posted by amanda at 3:20 PM on April 4, 2018
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posted by aniola at 12:04 AM on April 4, 2018 [1 favorite]