The Real Cost of the
Home Office Tax Deduction —continued

Example from IRS Publication 523. You sold your home on December 1, 2000. You had bought the home in 1990 and had owned and lived in it the entire 5-year period ending on the date of sale. For the first 2 1/2 years of that period, you used the entire house as your main home. For the last 2 1/2 years, you used 3/4 (75%) of the house as your main home and 1/4 (25%) of the house for business. Your records show:

Purchase price	$80,000
Depreciation (on business part; all after 5/7/1997)	1,363
Selling price	160,000
Selling expenses	10,000

Because you meet the ownership and use tests for the entire house, you can claim the exclusion for both the home and business parts. You start by finding the adjusted basis of each part. You determine that three-fourths (75%) of your purchase price was for the part used as your home; one-fourth (25%) was for the part used for business.

	Personal	Business
	(3/4)	(1/4)
Purchase price	$60,000	$20,000
Minus: Depreciation	-0-	1,363
Adjusted basis	$60,000	$18,637

Next, you figure the gain on each part, dividing your selling price and selling expenses between the two parts.

		Personal	Business
		(3/4)	(1/4)
Selling price		$120,000	$40,000
Minus: Selling expenses		7,500	2,500
		$112,500	$37,500
Minus: Adjusted basis		60,000	18,637
	Gain	52,500	18,863

Then, to figure your taxable gain and exclusion on each part, you decide to fill out a separate Worksheet 2 (Part 2) for each part, dividing your maximum exclusion between the two parts. You are single, so your maximum exclusion is $250,000.

		Personal	Business
		(3/4)	(1/4)
Part 2 - Exclusion and Taxable Gain
6)	Depreciation after May 6, 1997	$-0-	$1,363
7)	Subtract line 6 from gain	52,500	$17,500
8)	Maximum exclusion	$187,500	$62,500
9)	Exclusion (Smaller of line 7 or line 8)	52,500	17,500
10)	Taxable gain (gain minus line 9)	-0-	*
11)	Smaller of line 6 or line 10	-0-	*
* Lines 10 and 11 do not need to be filled out for the business part.

The gain from the part used as your home does not have to be reported on your return, because you can exclude all of it. You report the gain from the business part ($18,863) in Part III of Form 4797. You enter your exclusion ($17,500) on line 2 of Form 4797. Your taxable gain from the business part is $1,363 ($18,863 - $17,500).

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