House, barn, taxes, and a headache

I have another question and I hope you don't mind. It should be my last one for this year. (I hope!)

I purchased a little rural house two years ago and hired somebody to fix it up. Total costs: 22690 Dollars. I paid all in cash. It is has 813 sqm. Half of it I use for as my only place for business.

My sister is a bookkeeper in Europe and her advice makes me even more confused about deduction as I am already are.

Here is my headache:

My sister says that I should not deduct my house for the business use because that would cost me dearly if I one day want to sell the house privately. She says, if I deduct the business part from home, I have to sell the house then as business house and can't sell it as private house and that would be a big financial loss for me. Is she right?

(She does not know American tax laws just European laws.)

She says I should deduct the house only as a private thing. I should not deduct any business use.

But how should I do that? I have no mortgage. I paid the whole thing in cash.

If I write it off privately WHERE on 4010 do I write it off?

As it would be not already complicated enough, I bought a barn behind this house last year. I use it half for business and half to store private stuff. The barn did cost me 1615 bucks.

WHERE and how much of my storage barn can I write off?

Please ease my headache and give me some advice.

Very thankfully,

Taxpayer with big headache!

She is right in most respects.

If you are entitled to deduct the business use of part of your home -- what is usually called a "home office" deduction -- then that creates a depreciation expense that reduces current income, but which must be recaptured when the property is sold, resulting in ordinary income. This income in the year of sale cannot be excluded in the way that a capital gain from the sale of a principal residence may be excluded.

This is not necessarily a bad outcome, if you have a high income during the tax years during which the depreciation applies. But most taxpayers want to avoid this outcome, because the recapture appears all at once (although there are ways to avoid it: installment sale, like-kind exchange, etc.)

Where your sister may not be entirely right is in the suggestion that you have any choice in this matter. It is possible to "blow" the home-office deduction -- not qualify for it in the first place -- and this is a common bit of tax planning, but it depends on your facts and circumstances. If you are not using any part of your home exclusively for your business, then that blows the deduction and you can follow your sister's advice. But if you do not claim the deduction, and it is later determined you *could* have claimed it, then you are out of luck -- you must recapture the depreciation as if you had claimed it.

(A question for the group: does that ever actually happen?)

Finally, the numbers involved (50% of $26K) are sufficiently small that even if it is all recaptured at once at some future point it might not be that huge an impact. It really depends on whether your income is higher now than it will be then.

Steve