How to Sell Your Existing Home With Home Office Tax Free

By
Real Estate Agent with BANCROFT REALTY LLC 0637667

Combining Section 121 and 1031 Exchange

Your Uncle Sam really favors home owners.  Not only does he allow you some tax free gains on your principle residence.  He also gives you more tax free and deferred cash if you use the home as your office or rental.  To realize the gifts US as given, you must know the rules and play the game accordingly.  It takes some planning but as you will see it is well worth it.  I have been using my primary residence property as a rental for the past 2.5 years.  I will employ these rules to avoid and defer tax liability.

Sale of Home with Home Office

You bought a home for $200,000 and sell it for $300,000.  Over that time you have taken $30,000 in home office depreciation, which is 20% of your home.   Your adjusted cost basis in the property is $170,000.  This gives a capital gain of $130, 000.  This is how it breaks out.

The IRS defines the order on which the exclusions are made:

  1.  Section 121 comes first.  It cannot be applied to depreciation claimed after May 6, 1997.
  2.  Tax on gain is imposed on gains over the Section 121 limits.
  3.  1031 exchange is applied to the business portion to defer business tax liabilities
  4.  You add the Section 121 exemptions to the adjusted basis of the new property.

 

Total

Home

Office

Basis of Property

$200,000

$160,000

$40,000

Depreciation

($30,000)

 

($30,000)

Adjusted Basis

$170,000

$160,000

$10,000

Gain from sale

$130,000

$104,000

$26,000

Section 121 exclusion (1, 2)

(120,000)

($104,000)

($16,000)

1031 Exchange (3)

($10,000)

 

($10,000)

Gain subject to tax

Zero

Zero

Zero

The example shows that 15% capital gains tax was avoided and the 31% tax on ordinary income.  

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DISCLAIMER

This article is for training purposes only.  Jody Wall does not warranty the accuracy of the training.  It is not intended to be legal or accounting advice.  Seek competent consultation for your particular situation. Readers assume all responsibility for their decisions.

Published at http://blog.jodywallrealtor.com/business/tax/sell-home-office-house-tax-free.html

Comments (2)

Sybil Campbell
Fernandina Beach, FL
Referral Agent Amelia Island Florida

Were you a CPA before becoming a real estate agent or do you just know the rules really well Jody Wall?

Aug 28, 2016 03:43 AM
Will Hamm
Hamm Homes - Aurora, CO
"Where There's a Will, There's a Way!"

Wow Jody Wall, You are coming up with some great tips for us here in the rain.  Make it a great day!

Aug 29, 2016 12:27 AM

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