Undermined by unrecaptured gain

Essentially, Uncle Sam wants to make sure the Treasury gets back some of the depreciation benefits you claimed over the years. This comes into play if you took a home office deduction in the last 11 years, specifically since May 6, 1997.

This recaptured depreciation is taxed regardless of whether your overall gain is more or less than your allowable home sale exclusion amount. And it's taxed at a rate higher than the typical capital gains rate with which most investors are familiar.

OK, that seems simple enough. It's not the best tax news, but you can deal with the taxes due on $10,000 because, over the years, your home office deductions and associated depreciation provided you substantial tax savings.

Not so fast.

Recapturing Section 1250 costs

Although you report it on Schedule D, the form used to detail all your capital gain transactions, it has its own more-costly tax treatment.

"It's called unrecaptured Section 1250 gain," Stein says. "That is a class of capital gains that is taxable at a maximum 25 percent rate rather than the 10 percent to 15 percent rate that is available if you're selling stock or other assets."

In essence, because you've mixed business and residential use of the property, the depreciation deduction you claimed over the years for that home office is really just a deferral of taxes into the year when you sell the residence. And the 25 percent rate applies regardless of your ordinary income tax bracket.