Home office deduction

[jfoxcpacfp]

csciora wrote:

Well, the IRS is pretty clear about having to use and recapture the depreciation.

https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/sale-or-trade-of-business-depreciation-rentals/depreciation-recapture/depreciation-recapture-3

The argument is whether the tax impact is actually zero or not like you wrote on the blog. It’s my understanding that the depreciation recapture will lower the property basis which might push you above the $250K/$500K capital gains exclusion. In addition, tax on the recaptured depreciation is 25% vs. the more favorable 15% cap gains tax (or 0% cap gains tax) because it’s classified under Section 1250. There’s also the added complexity of filing the tax return(s) correctly. Since the typical homeowners only stay in their place for about seven years, your point about never selling is accurate but not particularly relevant for most people. It seems like 25% effective tax rate upon sale would be the deciding factor.

Is any of that incorrect or you feel it’s always offset by the immediate tax savings for high income earners?

Click to expand...

I believe you are grasping at straws. Don't know of many people who end up with a $250k per person LTCG in 7 years. It happens, but I'll advise our clients to go for the sure thing.

The added complexity is not a factor, at least in our firm. At the income/wealth/complexity levels we are discussing, it would be unusual to find a self-prepared return. Again, it happens, but that would wave a red flag at the IRS.

[jfoxcpacfp]

csciora wrote:

Well, the IRS is pretty clear about having to use and recapture the depreciation.

https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/sale-or-trade-of-business-depreciation-rentals/depreciation-recapture/depreciation-recapture-3

The argument is whether the tax impact is actually zero or not like you wrote on the blog. It’s my understanding that the depreciation recapture will lower the property basis which might push you above the $250K/$500K capital gains exclusion. In addition, tax on the recaptured depreciation is 25% vs. the more favorable 15% cap gains tax (or 0% cap gains tax) because it’s classified under Section 1250. There’s also the added complexity of filing the tax return(s) correctly. Since the typical homeowners only stay in their place for about seven years, your point about never selling is accurate but not particularly relevant for most people. It seems like 25% effective tax rate upon sale would be the deciding factor.

Is any of that incorrect or you feel it’s always offset by the immediate tax savings for high income earners?

Click to expand...

I believe you are grasping at straws. Don't know of many people who end up with a $250k per person LTCG in 7 years. It happens, but I'll advise our clients to go for the sure thing.

The added complexity is not a factor, at least in our firm. At the income/wealth/complexity levels we are discussing, it would be unusual to find a self-prepared return. Again, it happens, but that would wave a red flag at the IRS.

[csciora]

Well, the IRS is pretty clear about having to use and recapture the depreciation.

https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/sale-or-trade-of-business-depreciation-rentals/depreciation-recapture/depreciation-recapture-3

The argument is whether the tax impact is actually zero or not like you wrote on the blog. It's my understanding that the depreciation recapture will lower the property basis which might push you above the $250K/$500K capital gains exclusion. In addition, tax on the recaptured depreciation is 25% vs. the more favorable 15% cap gains tax (or 0% cap gains tax) because it's classified under Section 1250. There's also the added complexity of filing the tax return(s) correctly. Since the typical homeowners only stay in their place for about seven years, your point about never selling is accurate but not particularly relevant for most people. It seems like 25% effective tax rate upon sale would be the deciding factor.

Is any of that incorrect or you feel it's always offset by the immediate tax savings for high income earners?

[jfoxcpacfp]

csciora wrote:

I’ve never found it worthwhile. That includes running through the numbers again for 2016. The deductible expenses consist of mortgage interest, real estate taxes, homeowners insurance, maintenance costs and depreciation based on pro-rata portion of space dedicated for the office and storage space. You can calculate the pro-rata portion using percentage of usable square feet (be sure to include that finished basement) or by total rooms. The IRS is a bit fuzzy on exactly what constitutes a room, so I ended up with 1/7 = 14%. That’s about double what I could get using office square feet / usable square feet.

Those are the good points. Here’s the bad ones.

– you have to itemize to get the expense

– you can’t take the same expense twice, so the largest expenses of mortgage interest and taxes are already 100% deducted on my personal return.

– that left me about $10,000 in insurance and maintenance for which I have excellent records. 14% of that is $1,400 which saves me $210 in corporate taxes @ 15%. Maybe that’s worthwhile to you, maybe it’s not. Read the last point which made this entire exercise a waste of time for any home owner in my opinion.

– depreciation is the tricky one. I didn’t even bother factoring it in, since any depreciation you take as part of the home office deduction MUST MUST BE RECAPTURED when the property is sold. Depending on your capital gains exclusions when selling, it could very well cost more to recapture the depreciation than the tax savings from deduction. Even worse, the IRS assumes you have taken the depreciation expense simply by using the home office deduction. It doesn’t matter whether you actually used it or not. In the example above, I’d still have to calculate depreciation and apply it as a split between personal and business use of the home when it’s sold.

With all that in mind, I decided that potentially saving (since there’s other business expenses I can take) under $250 in taxes wasn’t worth the hassle and ongoing record keeping. I agree this particular deduction is hardly a red flag anymore (if it ever was since the dollars are so small), but that was never a concern for me.

Click to expand...

You might want to check out my article on PMD. The recapture boogie man is a non sequitur. Same for the IRS audit fable. We have handled hundreds of home office deductions over the last 35 years, probably in the thousands by now. Of course, the preparer's reputation with the IRS matters, and ours is exemplary.

A doctor with an expensive home at a tax bracket nearing 50% with a relatively spacious HO can approach $1,000/yr in tax savings, more if for IC income.

[jfoxcpacfp]

csciora wrote:

I’ve never found it worthwhile. That includes running through the numbers again for 2016. The deductible expenses consist of mortgage interest, real estate taxes, homeowners insurance, maintenance costs and depreciation based on pro-rata portion of space dedicated for the office and storage space. You can calculate the pro-rata portion using percentage of usable square feet (be sure to include that finished basement) or by total rooms. The IRS is a bit fuzzy on exactly what constitutes a room, so I ended up with 1/7 = 14%. That’s about double what I could get using office square feet / usable square feet.

Those are the good points. Here’s the bad ones.

– you have to itemize to get the expense

– you can’t take the same expense twice, so the largest expenses of mortgage interest and taxes are already 100% deducted on my personal return.

– that left me about $10,000 in insurance and maintenance for which I have excellent records. 14% of that is $1,400 which saves me $210 in corporate taxes @ 15%. Maybe that’s worthwhile to you, maybe it’s not. Read the last point which made this entire exercise a waste of time for any home owner in my opinion.

– depreciation is the tricky one. I didn’t even bother factoring it in, since any depreciation you take as part of the home office deduction MUST MUST BE RECAPTURED when the property is sold. Depending on your capital gains exclusions when selling, it could very well cost more to recapture the depreciation than the tax savings from deduction. Even worse, the IRS assumes you have taken the depreciation expense simply by using the home office deduction. It doesn’t matter whether you actually used it or not. In the example above, I’d still have to calculate depreciation and apply it as a split between personal and business use of the home when it’s sold.

With all that in mind, I decided that potentially saving (since there’s other business expenses I can take) under $250 in taxes wasn’t worth the hassle and ongoing record keeping. I agree this particular deduction is hardly a red flag anymore (if it ever was since the dollars are so small), but that was never a concern for me.

Click to expand...

You might want to check out my article on PMD. The recapture boogie man is a non sequitur. Same for the IRS audit fable. We have handled hundreds of home office deductions over the last 35 years, probably in the thousands by now. Of course, the preparer's reputation with the IRS matters, and ours is exemplary.

A doctor with an expensive home at a tax bracket nearing 50% with a relatively spacious HO can approach $1,000/yr in tax savings, more if for IC income.

[DMFA]

Right on - checked my return - turns out the home office was basically the only thing over 2% of my W-2 income. Everything else - licensing fees, professional society dues, white coats, reference subscriptions, board review, mileage between work sites - almost exactly equaled 2% of my income, and the amount I actually got to deduct was almost equal to my home office deduction. Glad I did it.

[csciora]

I've never found it worthwhile. That includes running through the numbers again for 2016. The deductible expenses consist of mortgage interest, real estate taxes, homeowners insurance, maintenance costs and depreciation based on pro-rata portion of space dedicated for the office and storage space. You can calculate the pro-rata portion using percentage of usable square feet (be sure to include that finished basement) or by total rooms. The IRS is a bit fuzzy on exactly what constitutes a room, so I ended up with 1/7 = 14%. That's about double what I could get using office square feet / usable square feet.

Those are the good points. Here's the bad ones.

- you have to itemize to get the expense

- you can't take the same expense twice, so the largest expenses of mortgage interest and taxes are already 100% deducted on my personal return.

- that left me about $10,000 in insurance and maintenance for which I have excellent records. 14% of that is $1,400 which saves me $210 in corporate taxes @ 15%. Maybe that's worthwhile to you, maybe it's not. Read the last point which made this entire exercise a waste of time for any home owner in my opinion.

- depreciation is the tricky one. I didn't even bother factoring it in, since any depreciation you take as part of the home office deduction MUST MUST BE RECAPTURED when the property is sold. Depending on your capital gains exclusions when selling, it could very well cost more to recapture the depreciation than the tax savings from deduction. Even worse, the IRS assumes you have taken the depreciation expense simply by using the home office deduction. It doesn't matter whether you actually used it or not. In the example above, I'd still have to calculate depreciation and apply it as a split between personal and business use of the home when it's sold.

With all that in mind, I decided that potentially saving (since there's other business expenses I can take) under $250 in taxes wasn't worth the hassle and ongoing record keeping. I agree this particular deduction is hardly a red flag anymore (if it ever was since the dollars are so small), but that was never a concern for me.

[jfoxcpacfp]

DMFA wrote:

I took the square footage-based deduction.  Got me an extra few hundred dollars.  Wasn’t bad.  If you meet eligibility under a couple clauses, mostly exclusive use and use “for the convenience of your employer,” you can take it even if you’re W-2.  You have to estimate the amount of time you actually use the office and claim you don’t use that space for anything else.  I’m W-2 and do a lot of my charts at home in a space that isn’t used for anything else, but it’s just a few cheap bookshelves, an old lamp, and a decent chair, and it’s not very big compared to my inexpensive home, so the simplified method actually did me better.  Now, if I had a ballin’ computer, a pair of 24″ 4K monitors, etc, then the actual expense rule would probably be better for me.

Also, I don’t think the home office deduction is subject to the 2% rule.  As per IRS Pub 587, pp. 21-23, especially example 2, the home office deduction is figured separately from employee business expenses not related to use of the home, which are only deductible for expenses beyond 2% of income.  When I filed my taxes last year, I wouldn’t have received any of the deduction since it was less than 2% of my income.

Click to expand...

Even the ballin' computer would be deductible under the simplified method.

As for the 2% rule, absolutely, a home office is subject to it if you file as a W2 employee. It is just another "employee business expense". Can't finure out where else you would have taken this deduction since you didn't have a business to use it on. You should go back and check your return.

[DMFA]

I took the square footage-based deduction.  Got me an extra few hundred dollars.  Wasn't bad.  If you meet eligibility under a couple clauses, mostly exclusive use and use "for the convenience of your employer," you can take it even if you're W-2.  You have to estimate the amount of time you actually use the office and claim you don't use that space for anything else.  I'm W-2 and do a lot of my charts at home in a space that isn't used for anything else, but it's just a few cheap bookshelves, an old lamp, and a decent chair, and it's not very big compared to my inexpensive home, so the simplified method actually did me better.  Now, if I had a ballin' computer, a pair of 24" 4K monitors, etc, then the actual expense rule would probably be better for me.

Also, I don't think the home office deduction is subject to the 2% rule.  As per IRS Pub 587, pp. 21-23, especially example 2, the home office deduction is figured separately from employee business expenses not related to use of the home, which are only deductible for expenses beyond 2% of income.  When I filed my taxes last year, I wouldn't have received any of the deduction since it was less than 2% of my income.

[jfoxcpacfp]

meccos wrote:

Johanna,

I am a partner in a large medical group and receive a K-1.  I have a room in the hospital but its not a private office, but rather a room where I see patients for consultations.

If i had a bedroom at home which is currently being used only as an office in which I reviewed charts, wrote notes, did some administrative duties and called patients at home for 30-60 mins a day, would that qualify me for a home office deduction?

Thanks for your expertise.

Click to expand...

Possibly - it sounds hopeful since the hospital does not afford you an office to handle these functions (what do the other doctors do? your partnership doesn't have office space?) However, this is something you need to discuss directly with your CPA/EA who is privy to all of the facts and circumstances of your situation.

[meccos]

Johanna,

I am a partner in a large medical group and receive a K-1.  I have a room in the hospital but its not a private office, but rather a room where I see patients for consultations.

If i had a bedroom at home which is currently being used only as an office in which I reviewed charts, wrote notes, did some administrative duties and called patients at home for 30-60 mins a day, would that qualify me for a home office deduction?

 

Thanks for your expertise.

[jfoxcpacfp]

meccos wrote:

I keep reading how home office deductions are easier than ever to claim as there is a standard deductions for home offices now.  How many of you guys claim home office deductions?   How can I know if I can qualify for this?   I review charts, write and close notes, read/write work related emails and sometimes call patients from home.   This typically will take me 30-60 mins per day at most.  Would this qualify me for a home office deduction if one bedroom is dedicated as an office mainly to do these things?  Can I also write off a computer purchase and internet services if part of the use of the computer and internet was for these purposes?

Also would the fact that I work as a partner in a large HMO versus private practice have any relevance on how or if I claim these deductions?

Click to expand...

Some answers in this recent PMD article. You can take a home office as a W2 employee if the office is required by your employer. However, your writeoff is limited to the 2% haircut after combining all employee business expenses, investment expenses, tax prep costs, etc.

As for the "new" simplified HO deduction, the actual expense method is almost always higher, especially in an expensive home, because you get a bigger depreciation deduction.

[meccos]

ndayev6 wrote:

https://www.whitecoatinvestor.com/forums/topic/should-you-have-a-home-office/

The answer to your questions can be answered by following the above link.

 

 

 

 

Click to expand...

Thanks.  Ill check it out.

[meccos]

Rex wrote:

I’m not an accountant but you are not eligible. You appear to be w2 employee and not self employed.

Click to expand...

Well I am a partner and I receive a schedule K1...

[ndayev6]

https://www.whitecoatinvestor.com/forums/topic/should-you-have-a-home-office/

The answer to your questions can be answered by following the above link.