Home office deduction on the house I'm live-in flipping, did I just wreck the tax treatment

The two things you read aren't in conflict once you separate the exclusion from the depreciation. Office inside the same four walls generally isn't treated as a separate property for the exclusion, so the gain on the whole house can still qualify. Depreciation you actually took is its own line and gets pulled back at sale regardless. So call it 14k exposed instead of 12 percent of your gain. Get that in writing from whoever signs the return, because the separate-structure version of this is a different answer entirely.

Question from the build side. Was the 85k mostly things that raise basis, or is some of it repairs you already expensed through the business? If any of that renovation ran through your books as a business expense on the office portion, you may have counted the same dollar twice, once as a deduction and once as basis. That's the trap I'd check first.

Everything in this thread is new to me but I'm reading it twice. What does recapture actually mean, that you pay back the deduction you took?

@rigging roughly, yes. You reduced taxable income each year by the depreciation, and when you sell, that reduction gets settled up at sale, usually at a different rate than the rest of the gain.

@thatch the number that worries me more than your 14k is the 505 to 520. How many of those comps are renovated to your level and how many are cosmetic? On an 85k spend at a 310 basis you're near the top of most neighborhoods, and if the real band is 470 to 490 your gain drops by 30 and the depreciation question becomes noise.

@girder's point is the one I'd chase. If the office was 12 percent and someone expensed 12 percent of a new roof through the business, that's a basis problem in a year that's probably still open.

Scope creep angle since nobody's said it. Four years and 85k in a house you live in almost always means some of that spend is lifestyle rather than resale value. The kitchen you chose because you cook in it every night, the office buildout for your business specifically. Buyers don't pay for the second one. When you're pricing, split the 85 into what a buyer will pay for and what you bought for yourself, and I'd bet 15 to 20 of it lands in the second bucket. That does more damage to your gain than recapture does.

Would it change anything if the office moved out of the house a year before the sale? I've read that stopping business use before you sell simplifies the year of sale, though the depreciation already taken doesn't disappear.

@pike that's the kind of thing that sounds clean and then has a rule attached to it. @thatch I'd walk into your CPA meeting with three written items, the depreciation schedule for the office, a basis worksheet for the 85k showing what was capitalized versus expensed, and the dates the business use started and stopped. If they can't work from that you've got the wrong CPA rather than a hard question. What I'd also want to know is whether your state treats the gain the same way the federal exclusion does, because some don't and that's the part people find out in April.