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If you have used part of your home as a home office, you haven't been using that part of your home as a principal residence at the same time. Fortunately, you don't need to allocate the basis of the property and the amount realized between the business portion of the home and the residential portion. However, gain must be recognized to the extent of claimed depreciation.
The rule is different when a separate part of the property was used for business purposes or rental income. For example, this situation would occur if the individual owned an apartment building and lived in one unit and rented out the other units. Generally, if the separate part of the property is used for business or rental purposes in the year of sale, the individual must treat the sale of the property as the sale of two properties (i.e., a residence and business or rental property). The sale of the business or rental portion of the property is reported on Form 4797, Sales of Business Property.
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Example
Bob Bruhaha sold his main home in 2007 at a $30,000 gain. He meets the ownership and use tests to exclude the gain from his income. However, he used part of the home as a business office in 2006 and claimed $500 depreciation. Because the business office was part of his home (not separate from it), he does not have to allocate the basis and amount realized between the business part of the property and the part used as a home. In addition, he does not have to report any part of the gain on Form 4797.
Bob reports his gain, exclusion, and taxable gain of $500 on Schedule D (Form 1040).
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