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Answer from our Guest Expert Peter Soh of AdviseInc.com
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The Exclusive Use Requirement Is Alive and Well
Of course, other home-office requirements still apply. One of the most important ones is the exclusive use requirement. The space you designate as your home office must be used regularly and exclusively for business. (In the case of an employee, that use must be for the convenience of your employer.) Bear in mind that occasional or incidental use of a home office will not satisfy the regular use requirement, even if the space is used exclusively for business. Exclusive use means that the space you designate as your home office may not be used for any personal or family activities that don't meet the home-office requirements. (For example, if you have a couch and TV in the "home office" it's not going to be meet the exclusive use requirement.)
One exception to the exclusive use requirement is if your home space is used for storing inventory or product samples of a business selling retail or wholesales products. Your deduction is limited to your income from your business activity.
The Deduction's Downside -- Selling Your Home
Unfortunately, the news isn't all good for home-office owners who sell their homes. When a portion of your principal residence is used as a home office and you have taken a home-office deduction on your tax return; you may lose part of another tax benefit. For homes sold at a gain on or after May 7, 1997, that portion of the home on which you claimed depreciation does not qualify for the home-sale exclusion of $500,000 ($250,000 for single filers). Instead, the depreciation you have taken is recaptured at the rate of 25 percent. Many people fear that deducting a home office is akin to waving a red flag at the IRS. Although taking the home-office deduction may somewhat increase your chances of an audit, most CPAs would encourage you to not let that dissuade you from taking the deduction if you qualify.
Hopefully, this gives you a clearer picture of the home-office deduction. Consider the home-office deduction as a part of your tax return this year, and discuss its pros and cons for your home-based business with your CPA or accountant.
Best regards,
Peter Soh of AdviseInc.com
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