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Author: TMFKeeler Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121185  
Subject: Home Office clarification Date: 12/8/1999 11:36 PM
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I've read the excellent Foolish tax guide, I've read Pub. 587, and I've read the FAQs and old posts on this board but I'm still confused on some aspects of the Office in Home deduction thing.

I have a home office, it is only used to telecommute to work (W-2 employee). As I understand it, I have two options. I can say this room is an Office in Home and deduct all the equipment used within, maintenance costs, indirect expenses, etc. and depreciation of the home. Or I can say I have a home office and deduct the same expenses but not the depreciation.

From reading this board it is obvious that doing the former creates tax liabilities later when you sell the house and general hassles.

Here is where I get confused...If I'm not already off ;-)

How does the 2% Misc. Deduction limit effect my situation? If I take the Pub. 587 Office in Home do I need to subtract 2% of AGI from my deductions? If I don't declare an Office in Home but just deduct my home office expenses, are they reduced by 2% of my AGI (minus any other Misc. deductions)? I doubt I'm making myself clear, it is hard to ask a question about something you don't understand LOL

Reading Pub 587 they talk about putting stuff on Schedule A and/or C. This will be the first year I will ever itemize so I'm not familiar with these schedules. This might be why I can't follow the IRS in their Pub. Is C only for the self-employed and not for W-2 employees?

Another thing is Schedule 179, can you use that for business equipment even if you don't claim an Office in Home?

Patrick

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Author: RooCat Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22657 of 121185
Subject: Re: Home Office clarification Date: 12/9/1999 2:23 AM
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Is C only for the self-employed and not for W-2 employees? Generally, yes, unless you are a statutory employee.

Home office for self-employed goes on Form 8829 and flows to Schedule C. Home office for W-2 would go on Form 2106 (line 4) then to Schedule A.

You may take Sec. 179 depreciation whether or not you claim a home office.

IMO, depreciation on your house, if you ever plan to sell, is not worth the trouble, especially since the percentage is fairly small as a rule (square footage used divided by total square footage times 3.4+ to 3.6+% [depending on the year of service]), besides having to recapture as ordinary income.

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22668 of 121185
Subject: Re: Home Office clarification Date: 12/9/1999 9:28 AM
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RooCat writes (in part):

IMO, depreciation on your house, if you ever plan to sell, is not worth the trouble, especially since the percentage is fairly small as a rule (square footage used divided by total square footage times 3.4+ to 3.6+% [depending on the year of service]), besides having to recapture as ordinary income.

I reply:

I might be wrong, but I believe that recaptured depreciation is not taxed as ordinary income, but is subject to a special tax rate of 25%. So for a taxpayer in the 28% bracket or higher, depreciation followed by recapture still leaves you ahead of the game. --Bob

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Author: TMFKeeler Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22670 of 121185
Subject: Re: Home Office clarification Date: 12/9/1999 9:33 AM
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Thanks RooCat for trying to wade through my muck of a post.

Depreciation as a deduction is not large, a few hundred dollars for me a year. However, 2% of my AGI is quite a bit of money. I was really wondering if there was any way around that for a w-2 employee (I'm not statutory afaik). However, it doesn't seem like if you claim a home office deduction or just put all your home office expenses as unreimbursed business expenses you can get around deducting the 2% AGI.

This brings up a new question. If I qualify for a home office deduction, but just claim unreimbursed business expenses (to keep from having to recapture my depreciation later), don't I have to claim a gain when I sell the house anyway? I am entitled to the deduction so I cannot exclude the gain of the business part of the house. If I say I don't have a home office, how do I claim these expenses as unreimbursed business expenses.

That was a garbled paragraph. Let me do it bullet style LOL

1. Can a W-2 employee get around deducting 2% of AGI from home business expenses?
2. If you are entitled to depreciate your home, how can you not do it? How can you not depreciate the home and claim unreimbursed business expenses for work at home?
3. When you sell a house, having claimed part of it as a home office and depreciated it, are you on the hook for more than the percentage of the capital gain in relation to the percentage of the house the home office represents? For instance, if the home office is 10% of the house, and I sell for $10,000 gain, am I being taxed that year on more than $1,000?

I can see that if the house increases in value faster than the depreciation allowed by the IRS (~2.5% per year) you could end up paying more in taxes when you sell than you got back in prior years by deducting depreciation. Is that why people are avoiding this deduction?

Patrick

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22698 of 121185
Subject: Re: Home Office clarification Date: 12/9/1999 2:51 PM
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Bob78164:

<<<<RooCat writes (in part):

IMO, depreciation on your house, if you ever plan to sell, is not worth the trouble, especially since the percentage is fairly small as a rule (square footage used divided by total square footage times 3.4+ to 3.6+% [depending on the year of service]), besides having to recapture as ordinary income.>>>>

Bob writes: "I reply:

I might be wrong, but I believe that recaptured depreciation is not taxed as ordinary income, but is subject to a special tax rate of 25%. So for a taxpayer in the 28% bracket or higher, depreciation followed by recapture still leaves you ahead of the game. --Bob"


Yes, but it is a home that we are talking about --- under certain circumstances gain up to 250k or 500k would not be taxable at all, so 25% recapture of any depreciation is > 0.

Even if gain is not excludible, if home is held for more than 1 year, LTGC rate would apply, and 25% recapture is > 20% LTCG rate.

Only if house is sold and gain is taxed as STCG is 25% recapture better than ordinary income tax rates for certain higher bracket taxpayers.

WRT AMT all bets are off because my knowledge is minimal at best.

Just my $0.02. Regards, JAFO


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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22707 of 121185
Subject: Re: Home Office clarification Date: 12/9/1999 4:25 PM
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JAFO31 writes (in part):

Yes, but it is a home that we are talking about --- under certain circumstances gain up to 250k or 500k would not be taxable at all, so 25% recapture of any depreciation is > 0.

I reply:

True enough, but the depreciation will reduce taxable income when taken, so you get an immediate tax benefit measured at the taxpayer's marginal rate. That tax benefit will usually be greater than 25%, so depreciation makes economic sense. On the other hand, whether it's worth the trouble and perceived risk of an audit is a separate, and highly individual question. --Bob

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22710 of 121185
Subject: Re: Home Office clarification Date: 12/9/1999 5:10 PM
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On the other hand, whether it's worth the trouble and perceived risk of an audit is a separate, and highly individual question.

One thing that I think has been missed in this discussion is that taking depreciation on a home office is not an election that you can choose to make or not make. If the facts show that you qualify to depreciate a home office, that depreciation is allowed. It can come back to bite you when you sell the home even if you did not deduct it.

To depreciate or not depreciate a home office, you must arrange your affairs appropriately. For myself, I'm in the no-depreciation camp. I have a separate room in our house where I meet with clients, do virtually all of my billable work, and keep my business records. However, I also keep all of our personal records there, I keep an extensive choral music collection there, and do all of our personal financial work there. I've tried to make sure I don't qualify for depreciation on the home office.

--ptheland

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Author: RooCat Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22767 of 121185
Subject: Re: Home Office clarification Date: 12/10/1999 3:10 AM
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1. Can a W-2 employee get around deducting 2% of AGI from home business expenses? NO.

2. If you are entitled to depreciate your home, how can you not do it? How can you not depreciate the home and claim unreimbursed business expenses for work at home? The key here is that depreciation may be taken. It is an election, sort of. You can also choose not to depreciate at all.

How can you not depreciate the home and claim unreimbursed business expenses for work at home? I do not see what one has to do with the other. Depreciation is just one of many possible expenses.

3. When you sell a house, having claimed part of it as a home office and depreciated it, are you on the hook for more than the percentage of the capital gain in relation to the percentage of the house the home office represents? What you recapture is exactly what you deducted as depreciation. I disagree with Bob that it is worth while since even at the 25% recapture rate, it is more than the possible exclusion at 0% or even LTCG at 20%. And to save what percentage now?

Is that why people are avoiding this deduction? Yes. Except it has nothing to do with your appreciation. It has to do with straight recapture. I just had a doctor friend burned big time over his sale of his house in Del Mar. He was stunned by what it cost him. (No, I am not his tax accountant or I would have warned him.)

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Author: RooCat Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22770 of 121185
Subject: Re: Home Office clarification Date: 12/10/1999 3:33 AM
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taking depreciation on a home office is not an election that you can choose to make or not make.
I certainly think it is.

IRC 167 and 168 permit<?I> a taxpayer to depreciate a capital asset. IRC 167(a) "There shall be allowed as a depreciation deduction..." It does not require a taxpayer to do so.

Additionally, a home office is to be used exclusively on a regular basis as principal place of business to entitle taxpayer to deduct any expenses for using their homes for business purposes. Keeping personal items as you are there would disqualify you according to the code. I can see the personal financial information since it is interrelated but purely personal effects makes it non-exclusive.

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Author: TMFKeeler Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22794 of 121185
Subject: Re: Home Office clarification Date: 12/10/1999 11:07 AM
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Thanks for all the help everyone :)

So I believe my decision boils down to the fact that I can't get around (being a W-2 employee) the 2% AGI rule anyway. So the question becomes Depreciate .0025% (home office being 10% of the house) as a tax deduction (also subject to 2% AGI rule) or not. I'm not sure I will meet the 2% AGI rule every year so I will probably not deduct depreciation and save myself the hassle.

One more thing, if you don't depreciate (you say the office use is not exclusive) can you deduct utilities cost and maintenance cost?

Patrick

A Fool and his money are soon partying
;-)

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22802 of 121185
Subject: Re: Home Office clarification Date: 12/10/1999 1:30 PM
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RooCat writes (in part):

taking depreciation on a home office is not an election that you can choose to make or not make.

I certainly think it is.


I reply:

I think the point is that depreciation must be recaptured whether it is allowed or allowable, whether or not is was in fact claimed. But my understanding (which very well may be wrong) is that this rule does not apply to the sale of a principal residence, as opposed to income property. --Bob

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22814 of 121185
Subject: Re: Home Office clarification Date: 12/10/1999 2:18 PM
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Me:
taking depreciation on a home office is not an election that you can choose to make or not make.
RooCat:
I certainly think it is.

IRC 167 and 168 permit a taxpayer to depreciate a capital asset. IRC 167(a) "There shall be allowed as a depreciation deduction..." It does not require a taxpayer to do so.


I'll concede that you are not required to take a deduction that you are permitted to take. But the recapture of depreciation will still get you. Recapture is on depreciation that was "allowed or allowable". This means that even if you didn't take the depreciation in prior years, it still has to be recaptured if it was allowable. It also means that if you mistakenly took more than was proper in prior years, that error gets corrected through recapture. This is one of those "heads they win, tails you lose" situations.

Additionally, a home office is to be used exclusively on a regular basis as principal place of business to entitle taxpayer to deduct any expenses for using their homes for business purposes. Keeping personal items as you are there would disqualify you according to the code. I can see the personal financial information since it is interrelated but purely personal effects makes it non-exclusive.

Right. By structuring my affairs the way I have, I'm also losing the ability to deduct a part of my utilities, maintenance, and repairs in addition to depreciation. I can still deduct direct costs (office supplies, tax research materials, computer - subject to other limitations, etc.), but not the costs of the office space itself.

--ptheland

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Author: RooCat Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22825 of 121185
Subject: Re: Home Office clarification Date: 12/10/1999 5:17 PM
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One more thing, if you don't depreciate (you say the office use is not exclusive) can you deduct utilities cost and maintenance cost?

Office space in home must be used exclusively. Even if you choose not to take depreciation, you can still take prorata portion of mortgage interest, utilities, insurance, real property tax, maintenance, per Form 8829.

(Bob, is this what you are referring to? "Residential rental property that is placed in service after 1986 is subject to the MACRS rules must be depreciated under the straight-line MACRS method. Therefore, recapture of depreciation on such property is not required, because no depreciation in excess of straight-line depreciation could be taken." CCH)

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22826 of 121185
Subject: Re: Home Office clarification Date: 12/10/1999 5:23 PM
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RooCat writes (in part):

Bob, is this what you are referring to? "Residential rental property that is placed in service after 1986 is subject to the MACRS rules must be depreciated under the straight-line MACRS method. Therefore, recapture of depreciation on such property is not required, because no depreciation in excess of straight-line depreciation could be taken."

I reply:

You're giving me way too much credit here. I'm referring to a few threads on this board about nine months ago, noting the existence and effects of the "allowed or allowable" standard. I have never used depreciation or the home office deduction in my life, and my knowledge of depreciation and recapture rules is limited to what I've read here. To the extent I can pass as knowledgeable, it simply means that Roy and the rest of the board are good teachers. --Bob

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22832 of 121185
Subject: Re: Home Office clarification Date: 12/10/1999 6:18 PM
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(Bob, is this what you are referring to? "Residential rental property that is placed in service after 1986 is subject to the MACRS rules must be depreciated under the straight-line MACRS method. Therefore, recapture of depreciation on such property is not required, because no depreciation in excess of straight-line depreciation could be taken." CCH)

RooCat -- You're reading an explanation of sec. 1250 relating to the recapture of depreciation on real estate used in a business. It basically says that depreciation in excess of straight line depreciation is recaptured as ordinary income. Any gain over that recapture amount is eligible for capital gain treatment. Because straight line depreciation has been the only choice for real estate since MACRS went into effect, sec. 1250 really only applies to older properties.

Uh Oh... I've been talking about recapture, haven't I? Unless the home office went into service before MACRS (1987 as I recall) there is no recapture problem.

<sweat glands on> There must be something else I was concerned about, then. ... It must be the rest of the gain.

<nervously trying to recover>
If part of your home is a business asset, it must not be a personal residence, right? If it's not a residence, then you can't exclude the gain. So when you sell the house, the part that was a business asset is going to be taxed. So we have a choice - take deductions now (depreciation, utilities, maintenance, etc.), or forego these in favor of tax-free gains later.

Am I on the right track here, or is my 7-year hiatus from the tax biz coming back to annoy me yet again?

--ptheland <==beginning to wonder how much of what he used to know still applies

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Author: RooCat Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22833 of 121185
Subject: Re: Home Office clarification Date: 12/10/1999 6:23 PM
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I'm sticking to my opinion on this one.

IRC 121(d)(6) says Recognition of gain attributable to depreciation. Subsection (a) shall not apply to so much of the gain from the sale of any property as does not exceed the portion of the depreciation adjustments (as defined in Sec. 1250(b)(3) attributable to periods after May 6, 1997, in respect of such property.

IRC 1250(3) Depreciation Adjustments says in part "For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed. (Italics mine.)

Of additional note, Kleinrock's Analysis: Sec 80.2 makes the "OBSERVATION: Taxpayers who have used a portion of their home as their principal place of business from the time they purchased it, should cause it to be disqualified and discontinue depreciating it at least two years prior to the sale of the home. Giving up the depreciation deduction is a small price to pay for having all of the gain (up to the $250,000/$500,000 limit) excluded, except to the extent of any post May 6, 1997, depreciation heretofore claimed on the property."

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22937 of 121185
Subject: Re: Home Office clarification Date: 12/12/1999 4:18 PM
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<<I'm sticking to my opinion on this one.>>

Sorry, RooCat...but I'll have to disagree.

<<IRC 121(d)(6) says Recognition of gain attributable to depreciation. Subsection (a) shall not apply to so much of the gain from the sale of any property as does not exceed the portion of the depreciation adjustments (as defined in Sec. 1250(b)(3) attributable to periods after May 6, 1997, in respect of such property.>>

Right...regarding depreciation AFTER May 6, 1997. Prior to that, depreciation was required to be claimed (under the allowed or allowable) rules. But it was generally not an issue. Because unless the property was used as "business" property in the year of sale, any prior depreciation deduction could be used as a basis adjustment...which was no big deal...since most times the property was "traded up" and there was no tax on the prior basis adjustements due to depreciation.

<<IRC 1250(3) Depreciation Adjustments says in part "For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed. (Italics mine.)>>

Right...if you can established the amount allowed. Which implies that you took SOMETHING. If you take nothing (using your election theory), you'll get hit with the "allowable" end of the stick.

<<Of additional note, Kleinrock's Analysis: Sec 80.2 makes the "OBSERVATION: Taxpayers who have used a portion of their home as their principal place of business from the time they purchased it, should cause it to be disqualified and discontinue depreciating it at least two years prior to the sale of the home. Giving up the depreciation deduction is a small price to pay for having all of the gain (up to the $250,000/$500,000 limit) excluded, except to the extent of any post May 6, 1997, depreciation heretofore claimed on the property.">>

Right they are...for any depreciation taken BEFORE May 6, 1997. But any depreciation taken after that date will be taxable. Period. And if you claim NO depreciation after that date (but should have...because you were using the home in office deduction) then you WILL get hit with taxes on the "allowed or allowable" rules.

Let me pull out my Kleinrock's disk (I don't use it much...other for court and PLR research...I'm and RIA and BNA guy).

Depending on the Kleinrock service that you use, check out the Tax Expert disk. Do a word search on "depreciation allowable allowed". Check out section 65.1 and you'll read:

"Regardless of the manner in which the taxpayer's original basis in
property is determined, certain upward or downward adjustments must be
made to that basis on the occurrence of certain events. Code Section 1016.
For example, capital expenditures, such as the cost of a capital
improvement, increase basis. Code Section 1016(a)(1). Depreciation
allowed or allowable decreases basis. Code Section 1016(a)(2). The
original basis, increased or decreased by these adjustments, constitutes
the taxpayer's adjusted basis."

Then go to section 69.4 and you'll see the real discussion on "allowed or allowable". After reading that section, I think that you'll come away with the understanding that depreciation is NOT elective...regardless of if you are dealing with the home in office deduction or any other assets where depreciation comes into play.

For those of you without the Kleinrock CD, here is what this section says in part:

"A taxpayer's basis in property is reduced for depreciation, amortization,
or depletion (collectively referred to in this section as depreciation)
with respect to the property. Code Section 1016(a)(2). The amount of the
reduction is the greater of allowable depreciation or the allowed amount
of the depreciation actually claimed by the taxpayer to the extent it
reduced his income tax. Taxpayers are cautioned to note that this
requirement causes a reduction in basis whether or not the deduction for
depreciation was actually taken. Therefore, taxpayers would be wise to
insure that they take the advantage of the deduction where available to
reduce their tax since the disadvantage of the reduction in basis to their
property is imposed whether or not the deduction is actually taken."

"Allowable depreciation is the amount that the taxpayer was allowed to
deduct under the law, regardless of whether he actually took more or less
or whether it resulted in a tax benefit. Reg. Section 1.1016-3(b)(2).
The determination is made on the basis of facts reasonably known to
exist at the end of the taxable year in question. In other words, a
taxpayer is not allowed to take advantage in a later year of her prior
failure to take an allowance, or her taking an allowance that was plainly
inadequate. In addition, the taxpayer is held to the method of
depreciation she used in the prior year, even if she could have taken more
depreciation under another method. Reg. Section 1.1016-3(a)(1)(ii).
However, if the taxpayer has never taken any depreciation, the amount
allowable is the amount allowable under the straight-line method. Reg.
Section 1.1016-3(a)(2). "

"Depreciation allowed is the amount that the taxpayer actually deducted.
However, it does not reduce the taxpayer's basis in the property to the
extent that the deduction did not result in a tax benefit (i.e., reduce
the taxpayer's income tax) or if the deduction was disallowed. Reg.
Sections 1.1016-3(b)(1) ; 1.1016-3(e)(1). Depreciation is treated as
resulting in a tax reduction if it reduces the tax either in the taxable
year in which it was claimed, or in some other year, as in the case of a
net operating loss carryback or carryover. The amount of depreciation
that did not result in a tax benefit is that part of the amount that
could be disallowed without increasing the tax previously determined. The
basis in the property need not be reduced for depreciation that is later
disallowed. Talbot v. Commissioner, 23 B.T.A. 792 (1931). "

I'm not sure if this responded to the original home in office question, but I hope that it solves the "allowed or allowable" issues. If not, let's keep talking.

TMF Taxes
Roy

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Author: TMFKeeler Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22956 of 121185
Subject: Re: Home Office clarification Date: 12/12/1999 10:09 PM
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>>>
I'm not sure if this responded to the original home in office question, but I hope that it solves the "allowed or allowable" issues. If not, let's keep talking.

<<<

Things are getting clearer. I have to admit though those IRS passages with allowable and allowed are not sinking in easily. I guess what is the issue becomes: When does the IRS consider you taking a home office deduction (whether you claim depreciation or not). Is it when you claim office equipment expense, utilities expenses (heat not phone), or something else?

I'm still not sure how much you get taxed when you sell the house either. Let's say the home office is 10% of the house. You take $1000 in depreciation over the years and sell the house for a $20,000 gain. Are you going to have a 25% tax liability on $1,000 or $2,000 ($20K x 10%)?

Would the answer to the above change if you deducted depreciation in the year you sold the house? Why does everything say to not do it for two years? Does it matter if you never owned the property before May 1997?

As a W-2 Employee, can you take your office equipment as a misc. deduction subject to 2% of AGI whether you claim a home office or not?

As a W-2 Employee, if you claim a home office you can deduct indirect expenses (utilities, maintenace, etc) and depreciation subject to 2% of AGI. But can't deduct any of those unless you claim a home office, right?

Specifically to me, I will probably only have misc. expenses above 2% of AGI this year. Should I take everything I can (indirect and depreciation too)? And what happens if I never take these again when I sell the house in five years? Do I just pay 25% on the depreciation I claimed five years earlier?

Further, I rented an apartment half this year and had a home office there. Is there any drawback to claiming the home office exemption there?

Sorry for all the questions ;-)

Patrick

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Author: RooCat Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22960 of 121185
Subject: Re: Home Office clarification Date: 12/13/1999 12:05 AM
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OK. I guess I'm convinced.

So I modify my position to say "Take the depreciation" since you only recapture the depreciation at the maximum rate of 25%. You still save 3% or more in taxes in the long run assuming you are in at least the 28% bracket.

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Author: RooCat Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22961 of 121185
Subject: Re: Home Office clarification Date: 12/13/1999 12:30 AM
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"When does the IRS consider you taking a home office deduction (whether you claim depreciation or not). Is it when you claim office equipment expense, utilities expenses (heat not phone), or something else?"

If you file form 8829 which expenses the direct/indirect costs on your home: (mortgage interest, property taxes, repairs & maintenance, utilities, insurance on your home, etc.) No, it is not for office equipment or a second telephone line.

"You take $1000 in depreciation over the years"

It would be taxed separately as "Unrecognized section 1250 gain" at a maximum tax rate of 25%.

"Why does everything say to not do it for two years?
Does it matter if you never owned the property before May 1997?"

Under the pre-May 1997 rules, all straight line depreciation was not subject to recapture if you converted the rental/business portion back to residential use at least 2 years prior to selling your home.

"As a W-2 Employee, can you take your office equipment as a misc. deduction subject to 2% of AGI whether you claim a home office or not?" Yes.

"As a W-2 Employee, if you claim a home office you can deduct indirect expenses (utilities, maintenace, etc) and depreciation subject to 2% of AGI. But can't deduct any of those unless you claim a home office, right?"
Correct.

"Do I just pay 25% on the depreciation I claimed five years earlier?" Depending on your income, that is the maximum tax rate on the depreciation recapture.

"Further, I rented an apartment half this year and had a home office there. Is there any drawback to claiming the home office exemption there?"

Generally, form 8829 is for homeowners. You could allocate the expenses in the approprizte catagories of the schedule C, but that's probably questionable. I'm sure Roy or others will step in if they agree it's questionable.

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22986 of 121185
Subject: Re: Home Office clarification Date: 12/13/1999 2:25 PM
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<<OK. I guess I'm convinced. >>

Good. Glad we're on the same page and verse now.

<<So I modify my position to say "Take the depreciation" since you only recapture the depreciation at the maximum rate of 25%. You still save 3% or more in taxes in the long run assuming you are in at least the 28% bracket.>>

Right...if that's the case then you'll save about 3% in the method by which the depreciation recapture is taxed...not to mention the time value of the money involved.

But one of your other points were VERY valid. Unless you want to pay taxes on the actual GAIN on part of the sale (not just the depreciation recapture), you'll want to make sure that you are NOT qualified for an office in home deduction in the year of sale. As you noted, if you do take the home in office deduction in the year of sale, then you are really selling TWO separate properties...the first is your principal residence (which may not be taxed), and the second being a "rental" property (which WILL be subject to tax...both for depreciation recapture and also gain purposes).

So the office in home issue can get very, VERY tricky. I'm glad we were all able to have this discussion and look at the pros and cons.

TMF Taxes
Roy

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Author: RooCat Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23006 of 121185
Subject: Re: Home Office clarification Date: 12/13/1999 3:47 PM
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you'll want to make sure that you are NOT qualified for an office in home deduction in the year of sale.

Is it just the year of the sale or is the 2 year qualifier still in place? I did not check the 1997 Reform Act for that.

Actually, I misspoke on the savings. You also save SET which is 14.13% of the depreciation taken so the potential savings is 17+% for the 28% bracket. If you are in the 15% bracket, savings would be 4+%.

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23083 of 121185
Subject: Re: Home Office clarification Date: 12/14/1999 4:03 PM
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<<you'll want to make sure that you are NOT qualified for an office in home deduction in the year of sale.

Is it just the year of the sale or is the 2 year qualifier still in place? I did not check the 1997 Reform Act for that.>>

It's only for the year of sale. It won't help you with the depreciation recapture computations (at least for depreciation taken after May, 1997), but it'll save you from allocating the sale of the property between business and personal purposes.

TMF Taxes
Roy

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