Sale of home with earlier year home office - how to enter deduction

mrbillium

I recently sold my home purchased 20 yrs ago. It has always been my primary residence but in summer of 2015 I tried a home business and filed federal claiming my mostly external office as ‘non-residential real property’ on 4562 which got me a $160 depreciation deduction.

The business office did not work for me and I only claimed it for that year (really 5 months) and that room has been ‘residential’ ever since.

Since I do have capital gains on my house sale, it looks like I need to cancel out the $160 deduction as income using form 4797 but am not sure how to do this.

Any pointers on how to do this?

PhillipB

Hello,

In this situation you would qualify for the home sale exclusion (Section 121) of 250,000 dollars if you file single or 500,000 dollars if you file married joint.

However, even if the entire gain is excluded, you will end up with a taxable gain of 160 dollars. This is known as depreciation recapture. If the rest of the gain exceeds your exclusion of 250k or 500k, the depreciation recapture amount will be included in the taxable gain amount. For example, if you're a single filer and the actual gain is 251,000 dollars, your taxable gain would be 1,000 dollars and that would take care of the depreciation recapture as well.

To enter this in the software, follow this menu path: Income > Sale of Main Home. Go through the screens, in the 2024 version, on the screen labeled "Let's see if you need to report your home sale" you will need to answer yes to the question "Have you ever taken depreciation on your home on prior year tax returns because of a home office deduction or renting your home?". Continue through the other screens and on the screen labeled "Tell us about your home sale" include all the information and the 160 dollars of depreciation on the line labled "All Depreciation Taken After May 6, 1997"

Let us know if there are additional questions or concerns.

Phillip, Tax Pro Agent

KristineS

Hi mrbillium,

Congrats on the sale of your home this year.

You are correct in that you'll need to report the prior year (2015) depreciation as income on your 2024 tax return.

In our software, follow this menu path to report the depreciation: Income > Uncommon Income > Sale of Home. Proceed through the screens and when you come to the screen titled, 'Let's see if you need to report your home sale' answer YES to the question, "Have you ever taken depreciation on your home on prior year tax returns because of a home office deduction or renting your home?"

Proceed forward.

On the screen titled 'Tell us about your home sale' at the bottom of the screen you'll be able to enter the amount of depreciation from 2015. Our software will handle all the calculations and in the preliminary view of your return, you'll see the amount of prior year depreciation claimed on Schedule D, Page 2, line 19.

Form 4797 is used for the sale of business property. Since the house was your personal residence when you sold it, Form 4797 is not applicable.