First, what is the SHOM? It is a 2013 IRS reg. that allows you to deduct $5/sq ft on a HO of up to 300 square feet, or a maximum of $1,500. You are allowed to take 100% of your real estate taxes and mortgage interest on schedule A rather than prorating them between schedule A and form 8829 (Home Office).
For a few people, this might actually save you a bit of taxes, unless you are subject to Alternative Minimum Tax (AMT) – and most doctors are. That’s because real estate taxes are used in the calculation for AMT and if you are deducting part of them against your business, that helps lower your AMT.
The alternative to using the SHOM is to use the Regular Option (RO), which allocates actual cost based upon the ratio of your office size to your home. Before 2013, it was the only option. How do you choose?
In general, the more expensive your home and/or the larger your HO, the likelier the RO will yield a higher deduction than the SHOM. The best way to compare is to actually calculate the results both ways. As you will find, it is far easier to calculate using the SHOM but you may be leaving money on the table.
The fact that you are losing the depreciation deduction and you cannot amend to get the deduction back tells me that the IRS created this method to lower your HO deduction.
So what happens when you sell your home? You will have to recapture the annual depreciation deduction that you have taken for your HO. In other words, you will owe taxes on that amount.
I’ve been asked, “Doesn’t this cut into tax-free gain on the sale of your home?”. Not exactly. All you are doing is repaying the taxes you saved in earlier years. Look at it this way – if you never sell your home, you come out way ahead. If you sell your home, you are breaking even.
So what questions do you have about home offices? Post below and I’ll answer them all!