I own and live in my own duplex. I also own a REI company which operates out of my home. For tax purposes, can I depreciate my entire property, or only the half of the duplex that is used as rental property?
Your rental property can be depreciated. Your personal residence can not.
An area of your residence (e.g., an office) can be used as a business expense if it is used solely for the busines but it’s a HUGE red flag to the IRS begging them to audit you. For me, the risk/reward never warranted it.
Keith
Keith-
So you wouldn’t recommend writing off my home office as a business deduction? What about all my other business deductions, such as my internet and cell phone bill, should I be worried about them as RED flags at well?
technically, the portion of your home used as a home office is depreciable.
but it’s recaptured when the property is sold, so I usually just ignore it.
As long as I can support a deduction, I do not tend to worry about whether or not the IRS will allegedly “red flag” it. If it is legal and ethical, it is mine and I will take it! When dealing with IRS agents, I routinely ask them what caused the audit in question. After 6+ years representing REI (and 7 years representing many different types of clients before that), I have yet to receive “home office deduction” as the reponse. Not saying it doesn’t ever happen, just that fears of a red-flag on this item strike me as a bit over-wrought.
I agree with Hyre.
Look at it this way: that $100 of depreciation saves you maybe $25 in tax. Probably adds that much to my fee to have to diddle with it. That’s why I usually just ignore the depreciation when figuring the home office deduction. It’s a “cost/benefit” thing.
Of course, if you’re doing your taxes yourself…
A CPA who gauges client’s cost vs. tax benefit before doing a thing? Mark, we are going to get along!
I agree, I often do not bother with depreciation on home, not worth the hassle. One caveat that I disclose to clients on this issue: IRS can technically force depreciation (and hence recapture) even if we omit it, though that seems to be quite rare in practice.
Golly John, it’s been a while since I’ve seen you around these parts…it’s good to see you around!
Keith
Thanks Keith. Between the practice and @ 80 MH pads, we’ve been busy. I figured on traveling to IN today & tomorrow to manage the MHP’s, but weather kept us in, so I thought I’d indulge in some posting.
I like your definitions, btw!
For those that haven’t had the pleasure, when John Hyre posts, you should pay attention! John is a gifted attorney AND a real estate investor…on top of that, he ‘gets’ it!
Hope you get ‘weathered in’ more, John - your advice is always spot-on and appreciated.
Keith
Just to verify-I can depreciate the rental half of my owner occupied duplex, and my numbers would look something like this:
I purchased duplex for $153K (I’m not going to include improvements in the cost basis just to keep things simple)
$153K/2=$76.5K is depreciable
$76.5K*1.364% (Year 1 mid-quarter % dep. found on 27.5yr IRS dep. tables)
=$1044 tax deduction
Is this close, or am I getting something wrong? Thanks for all your help
ps-I am doing my taxes myself this year!
pretty close. If you’re using turbotax or similar, it’ll handle the depreciation calc for you.
For do-it-yourselfers, I would certainly recommend such a program over pencil & paper. At the minimum it eliminates math errors.
A CPA who gauges client's cost vs. tax benefit before doing a thing?
are you implying that there are some CPA’s that would do otherwise?
I tend toward the practical. Or maybe I’m lazy. I tell it to you straight, no BS, and take care of business.
Maybe that’s why I lose very very few clients.
Mark, we are going to get along!
well, of course we will! :beer
Yep-I’m using turbotax. I just like to know how the calculations work in general. Thanks Mark!
I purchased duplex for $153K (I’m not going to include improvements in the cost basis just to keep things simple)
$153K/2=$76.5K is depreciable
$76.5K*1.364% (Year 1 mid-quarter % dep. found on 27.5yr IRS dep. tables)
=$1044 tax deduction
Just a couple of things wrong. Let’s just use the numbers you provided.
First let’s determine your depreciatiton basis. Land can not be depreciated, so you have to subtract the value of the land from your cost basis. I am guessing that the tax assessor’s property record will show that the value of the land is assessed at about 25% of the value of the property. So, using this ratio, the value of the land would be about 25% of your purchase price, or $38250.
Subtracting the land value from the $153K property cost basis to get the cost basis for the building structure gives you $114750. Since only half of your duplex is depreciable, then you divide the basis for the building structure in half to get $57375 as the depreciation basis for your rental unit.
Now, if you placed your rental property in service in August of last year, you need to use the 27.5 year Mid-Month convention table (not mid-quarter). The first year depreciation percentage for August is 1.364%, so your first year depreciation for your rental unit is $783 in this example.
Yeah, you’re right, my fault in forgetting to subtract the land from the equation, good catch. thanks dave
Thought I’d pass along this link. It mentions home offices and the IRS:
http://articles.moneycentral.msn.com/Taxes/AvoidAnAudit/TaxDeductionsThatShoutAuditMe.aspx?GT1=33005