"Unfortunately for homeowners, that is true," says Stein. "This unrecaptured Section 1250 rule, according to IRS language, 'applies with respect to depreciation that is either allowed or allowable.' Basically, you get stuck with it if you're entitled to take it, regardless of whether you've actually taken it."
"The way the rule reads, and this also is for rental real estate, that you are imputed depreciation deductions even if you don't take them," she says. "You have to depreciate what you are claiming as business use."
Because simply deciding against claiming the depreciation amount doesn't absolve you of owing taxes on it when you sell, you might as well go ahead and get the benefit of it while you're using your home office.
The depreciable life of business spaceAssuming you write off the space and proportionate utility, maintenance and mortgage payments and depreciate your home office space, Tollaksen says you also must be careful in computing the correct amount.
"The depreciation life of your home office is 39 years, since it's business," says the Illinois CPA. The IRS has determined the costs associated with business real property must be spread out, i.e., depreciated, over that time period. But often, home office taxpayers misread the rules.
"Many people use the 27.5-year residential property schedule since the office is in their home," says Tollaksen. "But in the IRS's eyes, it's a business regardless of its physical location, so business tax rules apply."
Remember also, says Tollaksen, that you can't use depreciation (that you report on IRS Form 4562) to create or increase a loss for business. "You then would have to carry forward that unused depreciation deduction into future business tax years," she says. "And that's where adequate records are so important."
For example, if you experienced a $2,000 loss because your home-based business had a bad year, you could claim the $2,000 loss on your Schedule C. But if your company made just $1,000 and you claimed home office depreciation of $2,000, you can only use half of that depreciation to get your Schedule C income to zero; you can't use it create a loss. In that case, you would carry the depreciation-created loss forward to the next or future years and use it to offset up to $1,000 of income when you have a better year.
Is it worth it?There was a period of time, says Tollaksen, "where you positively stayed away from" the home office deduction.
But most tax experts agree that taxpayers should take every tax break to which they are legitimately entitled. The key is to make sure that the maneuvers actually reduce your tax bill. And in some cases, you need to consider not just your current year tax bill, but future ones.
Businesses, says Tollaksen, typically are looking for bottom-line figures that make their financial statements look great and their tax filings look terrible "even if they have to pay in future."