alex.moskalyuk

New York Times describes a scenario that’s becoming far too common in the crowded real estate market. Establishing your home office is probably the best way to get a significant deduction if you’re claiming part of your income as self-employed or own your own business. If you’re renting an apartment and using one of the bedrooms as a home office, my accountant tells me that the square footage of the room used for business purposes divided by the total square footage of the apartment defines the percentage that’s available to you as deduction.

However, times are different now, and many homeowners in hot real estate markets find out the depreciation of their assets is not as tax-beneficial as the theory states it should be. Primarily because the value of the house, and therefore home office, increases with the time.

But what is crystal clear is that when you sell your home for a profit you have to recapture the depreciation you took on that office and pay taxes on it. For example, say you bought a house for $500,000 and used 10 percent of it for an office. (You figure that out by measuring the square footage of the office and dividing that by the square footage of the entire house.) You are allowed to depreciate 10 percent of the purchase price of the house each year using what the government succinctly calls the “39-year commercial property straight time depreciation schedule.” That adds up to about $6,000 in depreciation over five years.

You later sell the house for $750,000. The $250,000 in profit is excluded from tax. But the $6,000 you took in depreciation over the years must be reported as a gain on Schedule D, in the gains and losses section. It is taxed at a 25 percent rate. What if you take other home office deductions and skip the depreciation? Nancy Mathis, an I.R.S. spokeswoman, says that will not help.