How does IRS handle the sale of a home (Capital Gains Tax) when one of the rooms is rented to our business.?

Question

We have our own business and use 10% of the house as a rental to the business. We will be moving to another state next year and wondered about how this will affect our tax return since I had heard at one time that you would have to declare something on the gain in the sale process because of the business rental tax deduction we've been getting.

Answer 1

Your business tax return has been getting a rental tax deduction, but you have at the same time been reporting rental income on Schedule E on your personal tax return.

Anyway, when you sell your home, the property is 90% your principal residence and 10% business property.  You treat the sale as the sale of two different properties.  

The tax due on the gain from the sale of the business property (the 10% part) is not because of the rent deduction. The tax results from depreciation as well as capital gains.  

If you sell at a gain, you will have taxes to pay on the business property.  Your gain up to the amount of depreciation allowed is taxed at a maximum rate of 25%.  The remaining gain is taxed at a maximum rate of 15%.  You do not receive an exemption because it is attached to or part of your principal residence.

The principal residence  (the 90% part) qualifies for the exemption from capital gains tax, assuming your have owned and lived in the home for two years.  The exemption is $500,000 for a married couple.  Gains over that amount are taxed as capital gains.

This is a return you want done professionally.