"Robert" <malakitoatwork[at]hotmail.com> wrote

- quote -

It is correct that the $30K is a reduction in basis, so that
your basis is only $270K. But, even though your total gain
is less than $500K, you DO have to pay tax on at least part
of the $30K depreciation. You have to pay capital gains tax
(at the 25% rate not the 15% rate--unless you are only in
the 15% tax bracket) on ALL depreciation taken after May 6,
1997. The depreciation taken PRIOR to that date does reduce
the basis, but it is not taxed if you meet the ownership and
use tests.

Vida Freeman, EA

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"Robert" <malakitoatwork[at]hotmail.com> wrote:

- quote -

According to IRS Reg 1.121-1 no allocation of the section
121 exclusion is required for a portion of a home that is
used for business, unless it is seperate from the home .
However, any depreciation taken after May 6, 1997 on the
home office must be recognized as unrecaptured section 1250
Gain (25% Real Estate Gain).

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"Robert" <malakitoatwork[at]hotmail.com> wrote:

- quote -

The form is not ambiguous. Depreciation taken is not
subject to exclusion and will be taxed.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Boston, MA 02109

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Robert wrote:

- quote -

Depreciation after 5/5/97 (or so) is not exempt, but is taxed
at a rate of at most 25%. The rest of the gain is tax free
in this context. See publication 523 and the Schedule D
instructions.

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- quote -

Scroll down to Worksheet 2 to determine taxable gain
reportable on Schedule D (Form 1040) "Capital Gain or Loss".

http://www.irs.gov/publications/p523/ar02.html#d0e3263

"Jack" - John H. Fisher - TaxService[at]aol.com
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=

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Assuming my wife and I meet the ownership and use tests, and
assuming we have depreciated a portion of our home for a
home-based business, can the depreciation amount be
essentially tax free by including it in the $500k capital
gains exclusion?

In other words, assume a simple case where we buy a home for
$300k, depreciate say $30k of that for a home office over
five years, then sell the home for $400k. The way I read
it, you take the $300k, subtract the $30k of depreciation
and so your basis is $270k. Since $400k - $270k < $500k
(exclusion amount for a married couple meeting the ownership
and use tests), all of the gain is tax free. Is this right?

The reason I ask is that a paragraph in the Form 8829
instructions was ambiguous and might imply that I would need
to pay capital gains tax on the $30k in depreciation when I
sold the home. However, the publication that it refers me
to seems to say that depreciation for a home office is a
reduction in basis.

Thanks,

Robert

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