The "right" way is that depreciation would be based on the LOWER OF cost or fair market value of the home at the time the business use is begun. MTW
Read the full replyThis 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.
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.
[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
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.
Damn! I remembered the "5" and figured it had to be $50. Sorry, and thanks.
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.
The "right" way is that depreciation would be based on the LOWER OF cost or fair market value of the home at the time the business use is begun.
MTW
Eureka! Many thanks for the responses. I'd already looked at the simple method and found that the regular process would give a better deduction since she has a 360 foot photo studio and dedicated office space.
With the new standard deductions and limits on state taxes it would at least allow a portion of the mortgage and taxes and home expenses to be deducted, if I'm reading it correctly.
Thank you for reminding me that the portion claimed as depreciation will be treated differently at the time of sale -- which I don't expect to happen in the next 20 years.
Here's my last questions --
Exactly. But don't forget to deduct the coset/value of the underlying real estate - only the structure gets depreciated.
[the IRS's "Simplified Method": $5/sq.ft. up to 300 sq.ft.]
Right, because business use is a Schedule C deduction, not a Schedule A deduction. Schedule C deductions reduce the amount you put on your Form 1040, and therefore you get the benefit whether you itemize deductions on Schedule A or not.
The links I posted earlier lead to a helpful "FAQs - Simplified Method for Home Office Deduction" at
Extract:
"Q20. What effect does using the simplified method have on the requirement to recapture depreciation when the home is subsequently sold at a gain?
" A. For taxable years in which the simplified method is used, the depreciation deduction allowable for the portion of the home used in a qualified business use is deemed to be zero. Accordingly, you do not have to recapture any depreciation for taxable years in which you used the simplified method."
Extract from the same FAQ:
"Q5. Can the simplified method be used for one taxable year and the standard method be used in a later taxable year?
"A. Yes. You may elect to use either the simplified method or the standard method for any taxable year. However, once you have elected a method for a taxable year, you cannot later change to the other method for that same year."
Have something to add? Share your thoughts — no account required.
Ask the community — no account required