If you use part of your home as an office for your Maine-based small business, and deduct related expenses on your tax return, you may wonder if you can claim a valuable federal tax break when you sell. This tax benefit is the home sale gain exclusion, of up to $250,000 for single taxpayers. In many cases, it is possible to take advantage of this tax savings.

You can use the gain exclusion to shelter profit from the entire property as long as your deductible home office space is in the same dwelling unit as your residence.

In other words, business owners are not required to split the sale into two separate deals for tax purposes, one being for the sale of the residential part of the property, and another for the sale of the office part.

You will be taxed, however, on gain up to the amount of depreciation deductions on the office part of your property that were claimed for business use after May 6, 1997. The maximum federal rate on this profit is 25 percent. This isn’t so bad, when you consider the earlier tax savings collected from the office part of the property.

A Separate Dwelling

When the office is not in the same dwelling unit as the residence, but is on the property, the tax outcome is less favorable.

For example, say you claimed home office deductions for what was formerly a carriage house or garage, or even a finished basement with cooking and bathroom facilities and a separate entrance. In these cases, it is considered to be a separate dwelling unit that is not part of the residential portion of your property, even though it’s on the same property or in the same building.

For situations like these, in order to treat the sale as a single transaction eligible for the gain exclusion, you must pass the ownership and use tests for both the office portion of your property and the residential part.

If you fail the tests for the office part, you must calculate separate gains for the office and residential portions of your property. You can use the gain exclusion only to shelter profit from the residential part, and any gain on the office part is usually fully taxable.

You will generally owe a federal income tax rate of no more than 25 percent on gain up to the amount of post-May 6, 1997 depreciation. Any remaining profit from selling the office part of your property will be taxed at the regular capital gains rates.

Contact Filler & Associates if you are contemplating the sale of property with a home office. Advance planning may be necessary to maximize your tax savings.