§121 The $500,000 Exclusion on the Sale of a Primary Residence

Taxpayers are permitted to maintain a portion of their home for “business use”, to deduct the expenses of that portion of that “home office” as a business expense and to depreciate the portion of the home that is used as an office or rental.

However, when it comes time to sell the home, the portion of the gain attributable to the portion used as a business does not have the $250,000 exclusion available to it and tax must be paid or that portion of your primary residence must be exchanged, unless the owner uses a similar portion of his replacement primary residence for business purposes, and continues to deduct expenses. If the business portion is continued to be treated as a business property and the house remains the taxpayer’s principal residence for six years after it was acquired in a section 1031 transaction, then the portion used as a business has available that portion of the $250,000 exclusion to which it is entitled and no longer has to be exchanged.