@stech wrote:
@VolvoGirl
Can you please provide more details or if there is an online tool to help with this. I found this https://www.irstaxapp.com/depreciation-calculator-for-home-office/
I used $595K, $0 for Land (idk at this point) and Jan 1, 2020 as an example. I got $1,464. does this see accurate?
@Bsch4477 yes, I am self-employed as a day trader stocks. I have a separate room office in house which isn't used by anyone.
Your mortgage payment includes principal (the amount you borrowed to buy the house) and interest. Interest is a deductible business expense. If 10% of your home is a qualified home office, you would deduct 10% of your interest on schedule C and 90% of the interest on schedule A.
To get a deduction for the actual value of the house itself (wear and tear) you take depreciation, not a deduction for the mortgage principal. Depreciation for non-residential commercial property is over 40 years. Using a value of $595,000 for the house, $1464 seems about correct for 1 year's worth of depreciation for 10% of the home.
However, you can't set the land value to zero. Land does not depreciate (lose value due to wear and tear). If you don't know the value of the land your home is built on, your county tax assessor will have that information. Also, your base value for depreciation is the price you paid for the home when you bought it (minus value of the land), OR the fair market value when you placed it in service for business (minus value of the land), whichever is less. Real estate usually goes up in value, but not always.
Also be aware that when you sell the home, you will have a taxable capital gain due to depreciation recapture, even if the rest of the capital gains are covered by the usual $250,000/$500,000 exclusion for your personal home. You deduct deprecation now, and when you sell the home you have to repay that tax deduction. You have to repay the depreciation you took or could have taken, so you might as well take it. And keep all your records for as long as you own the home plus 3 years after you sell. Don't start tossing old tax returns, they contain depreciation information you will need when you sell.
If you take the home office safe harbor deduction, that is $5 per square foot up to $1500 maximum (300 square feet). In that case, you claim all your mortgage interest on schedule A, and you don't claim deprecation now, and you don't pay depreciation recapture when you sell. (You would lose the deduction for 10% of your utilities and 10% of your homeowners insurance.) The safe harbor may be worth considering since it means less compliance paperwork and may result in similar tax savings.
