Selling Property

When real estate used for your business is sold, and you make a profit, you will have to pay capital gains tax. This tax is paid only on the amount of money you earned, minus the costs you incurred while purchasing the property. These costs include the original purchase price, costs of improvements to the space, and expenses you acquired selling the property (real estate agent’s commission, advertising, etc.). You will also have to pay a 25% tax on any depreciation you took as a deduction on your taxes in prior years.

Using our example from the previous section, the property that cost you $200,000 initially has increased in value within the last five years to $450,000 and you decide to sell. Because you have a profit of $250,000 ($450,000-200,000), you will have to pay Capital Gains Tax on that $250,000, as well as an additional 25% on the depreciation you deducted from your taxes. Over each of the five years you owned the property, you deducted depreciation in the amount of $1,153.80 each year, for a total of $5,769 in deductions. Now that you are selling, you will owe depreciation taxes in the amount of $1,442.25 ($5769 x 0.25).

If, however, the business or studio is located within your living unit, you might not have to pay capital gain taxes. As long as you meet all other qualifications required for sale of a personal residence, you are allowed to acquire up to $250,000 in tax-free profit from the sale of your home. Married couples filing jointly are allowed to earn up to $500,000 in tax-free profit.

To be eligible, you must own the property you are selling, and have used it as your primary residence for at least two of the last five years prior to the sale.

If your residential and business spaces are in separate units of the same building, the gain on the sale must be distributed equally between the two spaces. For example, if you have a two-flat and use one unit for business and one for living, and made a profit of $50,000 off the sale of the property, you must allocate $25,000 to the living portion of the property and $25,000 to the business portion.

Only the residential part of the property might be eligible for not paying capital gain taxes. However, by law you must pay income taxes on any depreciation you deducted after May 6, 1997, even if you have stopped using your home for business purposes.

TIP: To get an idea of the additional art-related tax deductions you might be able to take, review the worksheet section of David Turrentine and Associates’ Website.

TIP: The IRS provides updated information for small business tax deductions each year in IRS Publication 334, Tax Guide for Small Business. Visit the IRS website to access a printable copy of the publication.