Should You Skip Home-Office Depreciation to Dodge Recapture?

Many taxpayers panic when they hear the term “depreciation recapture” and decide to skip depreciation on a home office to avoid future tax.

That strategy usually backfires. The tax law creates unexpected consequences when you claim zero depreciation, and those consequences often cost more than the recapture tax you tried to avoid.

When you skip depreciation, the IRS applies the allowed-versus-allowable rule. The depreciation you claimed counts as the “allowed” amount. The depreciation you should have claimed counts as the “allowable” amount. If you claimed zero depreciation but should have claimed $5,000, the tax law treats those amounts as different. That difference creates two problems.

First, you lose real tax deductions today. By skipping $5,000 of depreciation, you voluntarily increase your current tax bill.

Second, the tax law still treats the $5,000 as depreciation when calculating your gain on sale. That $5,000 reduces your basis in the home, which can increase your taxable gain later. In the wrong situation, you pay tax twice: once by losing the deduction and again through a higher gain.

The good news is that your prior tax returns protect you from depreciation recapture if you claimed zero depreciation. Section 1250(b)(3) allows you to use the amount actually claimed when calculating recapture. Your home-office deduction Forms 8829, which show zero depreciation, serve as adequate records. As a result, you avoid the unrecaptured Section 1250 gain tax on depreciation you never claimed.

But the law does not extend that same relief when you compute gain on sale. For taxable gain purposes, the IRS requires you to reduce your basis by the allowable depreciation, even if you never claimed it. That rule can push your gain above the Section 121 home-sale exclusion and trigger capital gains tax.

Despite this complexity, skipping depreciation rarely makes sense. Depreciation delivers immediate tax savings and valuable cash-flow benefits. The recapture rate often runs lower than your current income tax rate. You can also defer recapture through a Section 1031 exchange or eliminate it entirely with a step-up in basis at death.

The bottom line remains simple: Do not skip home-office depreciation. Claim the deduction, use the tax savings now, and plan intelligently for the future.

Your next step? Check out our Proactive Tax Strategy & Planning for Business Owners. While you're there, take the 2-minute Tax Strategy Assessment and get some free tax strategy ideas. Or reach out to us to see how we may be of service.

We provide these articles as general information and not individualized tax advice.  They do not constitute a client relationship with you, and any information provided here should be applied at your own risk.