When the pandemic forced many professionals into home offices during the first half of the year, it seemed like a temporary solution. As the virus has raged on, however, companies are figuring out that decentralization could lead to a better bottom line — and that leaves those of us working from home with an opportunity for a tax break.
Section 280A of the Internal Revenue Code allows self-employed people like Realtors to take deductions for certain business and rental uses, and that could lead to advantages down the line, says Russell Marsan, Senior Vice President of Investment Property Exchange Services, Inc.
“The long-term benefits of declaring a home office is that when you sell the property, a portion of the property can be used for tax-deferred 1031 Exchange instead of potentially having a taxable gain,” Marsan says.
First, you’ll need to establish your primary residence as a dual-use property.
- Talk to your tax advisor.
Your advisor will know how best to allocate the basis and gain for the portion of your home used as a residence and the portion used for your business.
- Understand the space.
The calculation used to determine how much of your residence is used for your business may be based on square footage, number of rooms used, or by an appraisal.
- Keep your expenses separate.
Treat that section of your house as you would an external office and pay for it with your business account. Be sure to keep records.
Once your home is officially considered a dual-use property, it could qualify for gain exclusion under the Section 121 primary residence exemption and as business or investment real estate, which would make it partially eligible for 1031 deferral.
Marsan and Investment Property Exchange Services, Inc., offer a wealth of information about 1031 Exchanges. For more information, visit their IPX1031 Insight Blog.