Sale of Home with Detached Home Office

Client sold home in 2017, which had a detached building that was used as a home office. It is my understanding that gain has to be recognized on the detached building, so I need to break the sales price down between the home and the building. There lies my problem. No realtor was involved, just fyi.

When home was purchased, we allocated a portion of purchase price to building based on realtor's estimated value at the time. Building was gutted and remodeled. Total basis in building (before depreciation) is around $110,000, which includes purchase price portion and remodeling costs.

In trying to breakdown the sales price between home and building, I am looking at various things. The property tax information allocates about 20% of the total value to the building, which would make 20% of the sales price be around $150,000, a $40,000 gain on the building (ignoring depreciation for simplicity). In looking at the appraisal, there is no separate appraisal for the building; however, in looking at the comps, the appraiser added back only $55,000 for the adjustment of one of the comparable homes not having a detached building. Can that amount legitimately be used as the value of the building? There is such a large difference between the two number ($150,000 vs $55,000), I'm not sure what the building should be valued at, and client is no help at all. Any suggestions or ideas?

This is a great question. Due to the large difference between the $55K and $150K I would recommend a realtor look at this and provide the client with a letter about the value of the separate building.

To add another twist on your question, what if the taxpayer's detached office is actually part of his/her personal garage/storage? Would it actually be taxable or would it be considered to be part of the home? The reason I ask is that I have a client who has a large detached garage with a full size attic used for personal uses and 2 car garage for personal, but the back of the garage has a little shop area where he works from and takes the home office deduction on his Schedule C. If he were to sell the house later, would this fit under the exclusion for sale of home office (only prior depreciation being taxable) being it is part of a personal area of the home or would this be considered a detached building and partially taxable?

Due to time constraints at this time, as well as client now lives across the country, don't see it as being feasible to get a realtor involved. I'm now thinking I will just take the sales price, back out the allocation for land (based on property tax allocation). Then I'll allocate the remaining sales price (for house and building portion) based on square footage, in order to calculate the gain. That number actually falls between the $55K and $150k numbers above, so I feel better about it.

SFB, not sure about your situation. Maybe someone else has run into that before!