Why is there home office depreciation recapture at all?

[prkwork]

In depreciating a home office, that office is supposed to be depreciated as commercial real property, which is MACRS straight-line over 39 years. Generally, §1250 property is depreciable real property (i.e., buildings and improvements) that is not subject to §1245. Now, a home office is "buildings and improvements". So, this home office nonresidential real property (in the MACRS 39-year class) is depreciable only under straight-line, this real property is not subject to recapture.

Yet, it has been my understanding that there is home office depreciation recapture, and many posts talk about matters surrounding this. But no one that I have seen explains why such depreciation recapture even exists, given the paragraph above. Please explain.

[sjrcpa · Accepted solution]

When you sell your home that has had prior depreciation, gain is taxable to the extent of depreciation claimed, assuming the rest of the gain is excludable under Section 121. This taxable gain is Unrecaptured 1250 Gain. EDIT: This gain is taxed at a maximum rate of 25% instead of being ordinary income.

This is different than the old 1250 depreciation recapture which was the excess of deprecation claimed over straight-line depreciation.

[prkwork]

Just to clarify: The gain is taxable to the extent of depreciation claimed or depreciation that could have been claimed. If this also is no more, tell me and cite where. Thanks.

[sjrcpa]

Depreciation allowed or allowable is still the rule.

[GingerU]

that is incorrect, unless I am reading  Pub 587, pg 15 (2022) incorrectly.  It says that "If you can show by adequate records or other evidence that the depreciation you actually deducted (the allowed depreciation) was less than the amount you were entitled to deduct (the allowable depreciation), the amount you cannot exclude (and must subtract from your total gain when figuring your exclusion) is the amount you actually deducted."

[sjrcpa]

IRS Publications are not authoritative.

[TaxMonkey]

This thread is fairly old, but I've seen this question come up a few times.

The basis of property must be reduced by the allowed or allowable amount of depreciation. IRC 1016.

However, if the taxpayer can show that the depreciation expenses were not taken, then the portion of the gain due to depreciation is taxed at the LTCG rate and NOT at the unrecaptured section 1250 rate (up to 25%).  In addition, the portion of the gain that was due to allowable depreciation that was not deducted can be excluded from taxable income via IRC 121.

(3)Depreciation adjustments

The term “depreciation adjustments” means, in respect of any property, all adjustments attributable to periods after December 31, 1963, reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for exhaustion, wear and tear, obsolescence, or amortization (other than amortization under section 168 (as in effect before its repeal by the Tax Reform Act of 1976), 169, 185 (as in effect before its repeal by the Tax Reform Act of 1986), 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, or 193). For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed.

https://www.law.cornell.edu/uscode/text/26/1250

More explanation here:

https://bradfordtaxinstitute.com/Content/Claim-Depreciation-or-Not.aspx

[BobKamman]

As you point out, an IRS publication is good authority when all it does is quote the Internal Revenue Code verbatim.  Does anyone know, without my looking it up, whether a taxpayer using the flat rate for office in home -- $5 a square foot, up to 300 -- is considered to have taken any depreciation?  And if so, how much?  How does it affect the Section 121 exclusion?  

[TaxMonkey]

The simplified method of $5 per square foot does not include depreciation and does not effect the principle residence exclusion.

https://www.irs.gov/businesses/small-businesses-self-employed/simplified-option-for-home-office-dedu...