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Archive for the ‘Business Use of Home Expenses’ Category

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Question: Form 8829, line 40 & 41…so confused?

Business use in home…12.5%

adjusted basis of home is $115,000 and land value $15,000.. I have no idea how to figure out depreciation for it. It was put into use when business started in Jan 2006. Not sure what to put on line 40 & 41. I can only find depreciation rates for rentals

Answer: She doesn’t have the records because this is a homework problem. If she had been doing this return since 2006 it wouldn’t be an issue.

Your basis for depreciation is $12,500. If the property is nonresidential, it is depreciated over 39 years. If it is residential, it is depreciated over 27.5 years. If this is an office in home, it is nonresidential and you use 39 years. Now, find the table for 39 years straight-line depreciation.

Depreciation percentage is 1/39 = 25.64%

Depreciation allowable 12,500 * .2564 (you do the math).

If you are going to be doing taxes next year, take my advice and avoid returns with depreciation as a first-year preparer. Take a course solely on depreciation before you do returns with depreciation. You are correct, it is confusing.

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Question: How do you determine the depreciation basis for a separate structure home office?

Pub 587 says you can deduct expenses for a separate free-standing structure if you use it exclusively and regularly for business. We’re looking at a 10×10 unit. Based on size, the structure does not require city permits and is not included in the overall property appraisal value. How would you calculate the depreciation expense and portion of utilities on the Worksheet to Figure the Deduction for Business Use of Your Home?

For example –
Home is 900 sq ft and Seperate structure office is 100 sq ft
Home original cost 300,000 (Land = 200K, Bldg = 100K)
Separate structure original cost = 10,000

Method A: Office space is 10% of total square footage. Total basis is 100K + 10K = 110K. Depreciation basis for structure is 10% or 11,000.

Method B: Original cost of separate structure used for depreciation basis 10,000

If using Method B, would you still use 10% square footage to determine indirect expenses like utilities? Can you include mortgage interest and property tax?

Answer: Since it is a separate structure, there is no reason to relate it to the size of the house. Land does not depreciate, so the lot price is irrelevant. You should depreciate the $10,000 cost over the useful life of the structure.

It appears that the mortgage does not apply to the new structure since the mortgage must already exist on the house and land. If you finance the structure cost, the interest would be deductible. Property tax would be deductible to the extent it increases as a result of adding the structure. However, the IRS would probably not question some portion of property tax applied to the structure.

You could estimate utilities on the basis of square feet being realistic. For example if you don’t have a bathroom in the structure, applying 10 percent of the water bill would be inappropriate. On the other hand, applying more than 10 percent of the electric bill might be reasonable if you have a lot of equipment, such as computers, refrig, electric heater in the structure. the important thing is to be realistic. And to the extent that your insurance covers both buildings, a portion should be applied to the office structure.

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