[Hidden-tech] home office deduction question

[Neal Priestly]

I am not an accountant - no matter what my diploma says.  That diploma is a
decade old and I took a sharp turn from internal audit to $then_employer's
alpha geek about 8 years ago.

Having gotten the disclaimers out of the way...

There are tax implications - and accounting record keeping implications -
around taking the home office deduction.  You've already been pointed to
the IRS pub that describes the (current) qulifications for being able to
claim space as a home office.  The rules change, sometimes subtly and
sometimes radically - starting and stopping and re-starting taking the
deduction is an even bigger red flag.

It's also been noted that having a home office deduction can raise a red
flag - doubly so if you've been in business for  a while and are only now
beginning to take the deduction, absent an expense to make previously
mixed-use space in your home suitable to be an office.

Any year you take depreciation against your house it lowers your cost basis
in the eyes of the IRS.  If you later sell the house they - being the IRS -
will try to claw back as much of that money as they can.  If you bought at
the top of the market and are now upside down on your house this may never
affect you - you may not bring your cost basis in the house down to it's
market value prior to selling it.

An example:  Suppose I purshased my home for 100,000 and performed two
major renovations at a total of 50,000.  My cost basis in the house is
150,000.  If I sell for 200,000 and don't purchase a new house for more
than 200,000 the IRS wants to tax whatever remains of the 50,000 increase
in value as a capital gain.  If I take the home office deduction and
depreciate the office portion of my home I lower the cost basis I hold in
that home by that amount - and take the tax benefit now of showing some of
the carrying cost of owning a home as a business expense which lowers my
current income.  The other side of that coin is that when I sell the house
- and the fact that I have made part of it an office may increase the value
of the home so it sells at 215,000 rather than 200,000 - my cost basis is
reduced by whatever depreciation I've taken over the years and I owe
capital gains on more of the proceeds of the home.  Also, I have to keep
really good records for the IRS lookback period (7 years) so that in the
case of an audit I can prove that I was entitled to take any and all
deductions given the rules in effect during the past tax year in question.

It's not so much a question about the *value* of your house as it is a
question of the IRS *valuation* of your house - though the decisions you
make can affect both.

I've seen a couple of people mention not taking the deduction in the tax
year prior to sale of the home.  I was pretty sure that loophole was at
least partially closed - I know attempts have been made to make it much
harder to get through, and if they have yet to succeed it's probably just a
matter of time before some chucklehead in DC cries "fairness" and lets slip
the weasels of bureaucracy.




At it's heart, the real question is "is cash in hand, now, worth the
paperwork and possibility of higher expense later."

Probably.

If your accountant wants more than an hour to consult with you on this,
perhaps she's no longer the right accountant for where you and your
business find yourself today.

-Neal Priestly
 Free Range Technologist



On Tue, May 1, 2012 at 7:46 AM, shel at frugalfun.com <shel at frugalfun.com>wrote:

>   ** Be sure to fill out the survey/skills inventory in the member's area.
>   ** If you did, we all thank you.
>
>
> Because, as the OP was concerned about, the IRS recoups thevvalue of the
> deduction at the sale,
> thus increasing your tax substantially--but not if you skip the last year.
> If you've been claiming it for a
> long time, it might be a good idea to take a picture of some non-business
> actvity being conducted in
> the space so you can prove you didn't qualify for it that last year.
>
> Again, not an accountant--verify this with someone who has some expertise.
>
> Original Message:
> -----------------
> From: Edbride-PR Ed at edbride-pr.com
> Date: Mon, 30 Apr 2012 21:04:03 -0400
> To: shel at frugalfun.com, tomadams at gmail.com,
> hidden-discuss at lists.hidden-tech.net
> Subject: Re: [Hidden-tech] home office deduction question
>
>
> This seems like rather odd advice. Why would that make a difference?
>
> I have sold two houses where I claimed an office, with no repercussions.
>
> Ed
> ----- Original Message -----
> From: <shel at frugalfun.com>
> To: <tomadams at gmail.com>; <hidden-discuss at lists.hidden-tech.net>
> Sent: Monday, April 30, 2012 5:09 PM
> Subject: Re: [Hidden-tech] home office deduction question
>
>
> I'm not a  an accountant and you should verify this--but what I rmemeber
> being told is if you don't
> take the deduction the eyar before you plan to sell, you should be OK.
>
>
>
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