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Home Office Tax Deduction Question

     
5:52 am on May 14, 2004 (gmt 0)

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I'm looking to buy a house and I was wondering if there is any difference between the following two scenarios in terms of a tax deduction.

1. Legal 3 bedroom -> 1 bedroom to be used as home office.

2. Legal 2 bedroom with bonus room (bonus room not counted in official total square footage registered with county) -> bonus room to be used as home office.

Can I deduct the bonus room? Also, can I deduct the down payment partially?

6:07 am on May 14, 2004 (gmt 0)

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AFAIK the deductions are based on % of square footage used for business, and have nothing to do with the layout.

I am not aware of any option for deducting a down payment - it is about expensing operating costs, not ownership (since the business isn't buying the property). Business use portion of depreciation and upkeep are already accounted for in the deduction rules.

Definitely check with an accountant.

6:18 am on May 14, 2004 (gmt 0)

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The "bonus" room seems like (please correct me if I'm wrong) an addition to the house without the necessary permits.

That's a tough one. You may want to consult an accountant about that. If he/she doesn't know the answer, they may know who can give it to you.

6:39 am on May 14, 2004 (gmt 0)

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As per down payment deduction, I just figured that if I can deduct the cost of buying a hard drive, which is part of the operating cost, why shouldn't I be allowed to deduct the (partial) cost of the place I will be working in? They are both expeditures on physical assets.

As per bonus room, yes exactly, I'm seeing lots of places in bay area with converted garages etc.

I'll check with an accountant for both cases, thanks.

11:12 am on May 14, 2004 (gmt 0)

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> I just figured that if I can deduct the cost of buying a hard drive, which is part of the operating cost, why shouldn't I be allowed to deduct the (partial) cost of the place I will be working in? They are both expeditures on physical assets.

You can. But there are tax loopholes - as when you sell the house, the tax man will want an amount of tax from you for selling a business asset. It is better to have a 'mixed' room to avoid these problems.

---( UK based, different countries could differ )---

2:41 pm on May 14, 2004 (gmt 0)

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Carefully read IRS' publication 587: Business Use of Your Home [irs.gov...]

It details what deductions you can make, how much, how you can deduct depreciation, etc. Before going to an accountant, pour over this document first. The thing to be careful is that IRS keeps a watchful eye on home use for business tax deductions, and large deductions (as can be expected if you figure in your cost of purchase) increases the chances for your tax submission to be flagged.

7:58 am on May 19, 2004 (gmt 0)

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Isn't the down payment a security deposit to the landlord. This is seen as some form of refund upon the end of tenure, meaning it is not a capital or operating expense, but merely a loan of sorts.
10:10 pm on May 20, 2004 (gmt 0)

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Isn't the down payment a security deposit to the landlord. This is seen as some form of refund upon the end of tenure, meaning it is not a capital or operating expense, but merely a loan of sorts.

The down payment would be in lieu of a loan. It would be used to purchase part of the land/building (house), so I don't see why I wouldn't be able to write it off, but I it would be necessary to definitely talk to an accountant about that.

10:41 am on May 21, 2004 (gmt 0)

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I charge my business a percentage of the morgage for the room I use. I took my mortgage and divided it by my overall squarefootage. I used that rate x the squarefootage of my office to compute my montly rent that my business owes me.
11:33 pm on May 21, 2004 (gmt 0)

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I charge my business a percentage of the morgage for the room I use.

Right, this makes sense. My additional question has to do with the down-payment part of the payment. This is a one-time payment I would make when first buying the house. I need to check with an accountant to see whether I can write-off any part of the down-payment.

3:45 pm on May 22, 2004 (gmt 0)

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Yeah definitely check with your CPA and report back if you donít mind. I'd love to be able to file an amended return to take advantage of this.
3:57 am on May 25, 2004 (gmt 0)

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One of the best ways to get audited--aside from reporting your occupation as "crack dealer"--is to claim a home office deduction.

Take a bit of time to figure out just how much that deduction might save you in actual dollars. Then weigh that number against the cost for an IRS agent to take up one, two or even three days of your time--all the while you're not able to do business. I've had three IRS audits, and came out squeaky clean each time. Nevertheless, the audits required me to shut down while I answered questions right down to a $10 check to my mother-in-law (from my personal account, not corporate). Never mind that the $10 was for potted plants my wife bought but didn't have cash with her.

When the IRS computers red-flag you, the agents are not told why. The reasoning, as the last agent explained to me, was that the agency doesn't want their agents to go looking for what red-flagged the return and just stop there. They want them to go as far as they think they need to find anything possible.

That agent was the third who took days out of my work week to come up with absolutely nothing done wrong. In fact, he wrote a letter to the agency saying that this had been my third audit in less than ten years, and there should be no further justification for more audits.

I would humbly suggest you compare the dollar amount saved from taxes versus lost income. The IRS certainly does. In fact, they count on it.

4:44 am on May 25, 2004 (gmt 0)

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I'm not saying that you don't need to consult a tax adviser (CPA), but I can tell you right now that the rules will not permit you to deduct a portion of your house down payment as a home office business expense.

The rules require that you deduct a percentage of the purchase price over a period of many years (I forget how many) in the form of depreciation. The percentage is based on square footage devoted to business purposes. These rules are complex, and you should understand them.

When you sell the property, you "recapture" the depreciation, and must pay tax on the amount "recaptured".

Because so many taxpayers are self employed and working out ot their homes these days, the IRS has de-emphasized this deduction as a red flag. As long as you're reasonable, you're pretty safe.

 

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