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Home depreciation, mortgage interest, and property tax.

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  • Home depreciation, mortgage interest, and property tax.


    I have a 5000sqft home with an office space of 320sqft.  My homes utilities, insurance and home maintenance comes out to about $13K.

    Total Property tax is about $12K, mortgage interest is about $8K.

    I believe based on those numbers I am much better off deducting the $5/sqft x 300 sqft for a total of $1500 then deduct property tax and mortgage interest on my personal tax return.  Am I missing something?

    I believe I am missing depreciation on my property.  Do I need to take depreciation and if so, how do I calculate it?  IS there a benefit to not taking depreciation if I expect the house to increase in value substantially by the time I sell it and don't want capital gains over the $500K limit.


    Can someone please offer me some advice?


  • #2
    I'll respond to the last issue first. There is no benefit to forgoing depreciation. It is a bird in the hand versus the two in the bush that you might someday have to recapture and pay taxes on it. Better to get the up-front deduction. I've heard CPAs say to forego depreciation because you'll just have to recapture it "if" you ever sell your house. The logic escapes me. And that's not even considering that the IRS has classified depreciation as a "use it or lose it" deduction.

    If you could share the cost of your home, I could tell you why to take the actual expense. I would be very surprised if you came out better with the shortcut version, which, by the way, is irrevocable.

    btw, I just ran the numbers with a cost of $300k, and the deduction without deprn. is over $2,000.

    And why would you want to move all of your RE tax and mortgage interest to your sch A, anyway?
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      Sure, thanks.  The cost of the home is $430K (thank you housing bubble.)

      I guess I don't see the need to take mortgage interest and property tax on the business since I can just as easily take it from my personal tax return.  Also, since I do not have many other deductions, I find that I am better off paying my property tax twice in one year, and not paying it the next year.  For example I payed 2014 Property tax of about $12K in January of 2015 and then I payed 2015 property tax of about $12K in Dec of 2015.  Therefor total tax was $24K in 2015.  In 2016 I will once again forgo property tax payments until January 2017.  Since my salary is over the Social Security maximum, the only thing I am giving up is the 2.9% medicare tax.  But if my actual expenses as percentage of home is about $800, the medicare portion I am saving does not come out to over $700 therefor maybe the standard $1,500 deduction is best.  I calculate the medicare savings to only be about $55 and $700>$55.

      Maybe my math is wrong.


      • #4
        A deduction "above the line" is always better than an itemized deduction. You are not only lowering business profits but you are lowering AGI (Adjusted Gross Income) which interacts with a variety of tax attributes.

        Using $30k for the land value and the amounts in your initial post, I calculated a HO deduction of $2,760. If you'd prefer to deduct only $1,500, that is your privilege. It's not my money; I'm just here to bring clarity.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


        • #5
          $2760 hmm. Okay let me see if I got the math right.

          Home office is 6.4% of my home $13K for Utilities, home maintenance, and insurance.

          $30K for property tax, and mortgage interest.

          $43K * 6.4% = $2,752


          Then I need to take the depreciation which I still need to figure out how to do. Which brings me to my next question.  How to depreciate my home.

          If for example the land value is $30K and the home was bought for $430K  then I can depreciate the value of $400K over the next 27.5 years.  Is that correct?

          That comes out to about $14,500.  I can depreciate 6.2% of it from my home office so another $928.


          Is that correct?


          • #6

            1. You depreciate your home office over 39 years, not 27.5 (which is for residential rental prop).

            2. 13 + 12 + 8 = $33k, not $43k

            Otherwise, you're correct.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


            • #7
              Joanna, cool and thanks.


              Do you do consulting work?  I mean review tax strategy and optimize for a person for a flat fee or hourly rate?  Maybe during the "off season." I want to start doing my own taxes since I am sick and tired of relying on others to do something I should and could do myself.  I am highly disappointed with the last 3 tax advisors I have had.



              • #8
                Yes, we do. All of our services are tailored to the individual's needs. I think everybody should get an unbiased second opinion from a professional who has no dog in the fight. Even if you get an a-ok, it can settle any doubts as to whether you're working with somebody who is doing a good job - or not. Hard to tell otherwise.
                Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


                • #9
                  May I ask what you charge on an hourly or flat fee rate?  I am strongly considering doing this in the summer.


                  • #10
                    That's fine - I appreciate your asking. $250/hour for a one off or by FPA (Fixed Price Agreement) for ongoing. Just to explain, an FPA is an agreement we prepare for a prospect. It lists all services you get for one year, including tax prep and unlimited discussions, along with the cost. It also includes audit protection and amended returns. Our clients get full disclosure in advance in order to make an informed decision about whether to use our firm or not. For what you're talking about, though, it would be hourly and I'd give you an estimate of the time in advance. Shouldn't be over 2 hours (at the most) unless your situation is pretty complicated, though.

                    We transmit documents via our secure portal, not email, and have clients throughout US and in Mexico.

                    ok, enough of the promo or WCI will ban me.
                    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087