Home Office Deduction

This is the first year daughter-in-law qualifies for home office deduction because she never had an area that was used exclusively for her business. When reporting value of home do I use cost of home at purchase six years ago - or value of home at the time of conversion. Cost would mean lower deduction now. Current would have more impact if they were to ever sell.
Is there a choice or is there a "right" way to do it?
Thank you.
Reply to
ramridge
There are two ways this can be done. One is to use the percentage of square footage in relation to the entire property, then depreciate that portion of the cost basis of the house (not including the underlying property, meaning normally about two-thirds of the purchase price of the house).
The downside of that is, when and if the house is eventually sold, the amount depreciated will have to be "recaptured," meaning that amount will be subject to ordinary income tax, not capital gain.
The other approach is that the IRS has a flat amount per square footage that they allow her to deduct (I think the last time I checked it was $50 a square foot). If she does that, there is no depreciation of the house and no recapture if the house is ever sold.
Reply to
Stuart O. Bronstein
[depreciation deduction for business use of home]
Looks like it's a measly $5 a square foot, up to 300 s.f. The $5 isn't a typo; pub 587 says the same
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That topic also says that this flat rate replaces the _entire_ business-use-of-home deduction, not just depreciation. "Deductions attributable to the home that are otherwise allowable without regard to business use (such as qualified residence interest, property taxes, and casualty losses from Federally declared disasters) are allowed in full on Schedule A" -- if you itemize, of course. But you lose the ability to take them off the top as an expense of your business.
Reply to
Stan Brown
In article snipped-for-privacy@news.individual.net>,
Sounds like there are plenty of situations where that could be attractive. Remember that depreciation is really more of a loan that comes due when you sell the house. As I understand it, the $250K/$500K residential capital gain exclusion doesn't apply to business use, so you have to pay tax on the gain on your depreciated home office.
Reply to
John Levine

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