If your home office was located within your home, you do not need to allocate the gain (profit) on the sale of the property between the business part of the property and the part used as a home. This means that your entire profit qualifies for the special home-sale tax exclusion.
Under this exclusion, a substantial amount of the profit you make on the sale of your home is not taxable: up to $250,000 of the profit for single taxpayers and $500,000 for married taxpayers filing jointly. You qualify for the exclusion if you lived in your home for at least two out of five years before you sell it.
Example: Richard, a single taxpayer, lived in his home for 10 years and had a home office in a bedroom, amounting to 10 percent of the home. He sells the home for $100,000 profit. Since the office was within the walls of his home, his entire profit qualifies for the $250,000 exclusion and Richard owes no tax on it.
On the other hand, if your home office was not located inside your home — for example, it was in an unattached garage, cottage or guest house — you must allocate your profit between the living and office portions of the home and pay taxes on the profits that you allocate to your office.
Example: Assume that Richard from the above example has his home office in an unattached garage, amounting to 10 percent of his total home. Since his home office was not within the walls of his home, he must allocate his $100,000 profit between the main home and office. He owes tax on the $10,000 of capital gains attributable to his office (10 percent x $100,000 = $10,000).
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