A couple questions... If we refinanced our home multiple times prior to establishing a home office, do we include the refinance fees from each instance when determining

[weaslebub]

A couple questions... 

If we refinanced our home multiple times prior to establishing a home office, do we include the refinance fees from each instance when determining the cost basis for our home office? If so, are there particular fees from refinancing that should or should not be included?

Also, this is the second year of claiming our home office. The first year we didn't keep as thorough records and were concerned we would do something wrong when calculating the office deduction, so we chose the safe route of using the simplified office deduction. This is why we are now having to enter the cost basis for our home. My questions is, when entering the cost basis for the first time, do we include any and all capital improvements we've made since buying the home as part of the cost basis, or do we enter each one individually and depreciate them separately?

Finally, how critical is it to find the closest matching Business Code on a Schedule C and can this code be changed from one year to the next without raising a red flag? We have looked through all of the available codes repeatedly and found several that could apply. None fit perfectly so last year we picked what sounded the closest. When preparing for this year's taxes we took the time to dig deeper into the meaning of the code we used last year, it turns out that we unknowingly picked a code that is intended for a much larger organization and one that provides medical and family services for specific recipients. This is not even close to what our business does, and to continue using that code would be inaccurate. I've tried contacting the IRS directly but can't seem to pick a series of phone prompts that gets me to a live agent. We want to change to a different code this year but didn't want to raise any red flags in the process, plus we are again faced with finding the closest description that isn't exact. Seeing that a code exists to describe everything else not listed (99999-UNCLASSIFIED), it wouldn't appear that this is a terribly critical issue. Any thoughts?

Thanks!

[Critter]

 do we include the refinance fees from each instance when determining the cost basis for our home office?   NO

do we include any and all capital improvements we've made since buying the home as part of the cost basis  YES

Finally, how critical is it to find the closest matching Business Code on a Schedule C and can this code be changed from one year to the next without raising a red flag?  Choose the best choice and stick with it going forward ... don't sweat this issue.

[weaslebub]

Thank you. Regarding the cost basis, the reason I asked this is because TurboTax instructions at this section say the basis is what the cost was including whatever you spent to acquire it. For financed properties, it's whatever debt you took on to acquire it. Given that we had costs associated with the initial purpose, and then refinanced twice using no-cost refinancing, which means we had the cost of this refinance rolled into our loan balance each time and the loan amount already reflects this debt.  If I can't include refinance costs then do I go back to the original loan and include those costs to acquire the house, or do I use the amount from the most recent refinance and deduct the closing costs that were rolled in?  As for the capital improvements, I recently asked TT Support about an HVAC improvement we did last year and I was told to add this as a capital improvement. I was asking them for clarification on whether it was an expense or a capital improvement, but I didn't ask whether that meant to add it to my original cost basis or if it meant I needed to add a separate HVAC Asset entry on the Home Office Asset Summary page in addition to the house asset. My understanding was that I needed to add the HVAC as it's own Asset entry, which represents the capital improvement made to my house. I may have completely misunderstood how to do this, which is why I need some clarification. Are you saying that's not the way to do this?

[Critter]

The cost basis = the purchase price + improvements ... it has nothing to do with the debt or mortgages or refinancing.

When you refinance you are just taking out equity ( a nontaxable event) or lowering payments ... neither of which effects the underlying cost basis.  

So when the program asks for the cost basis on a new asset placed in service  just enter one amount.  If you add the AC after you started depreciating the home  THEN it would be entered as a separate asset.

Now some folks go crazy when placing a new property into service and  breakout everything they can like all the appliances and make a dozen different entries  but that is not needed at all and a big waste of time especially for your use ... so just make one entry for the home and call it quits.    

[weaslebub]

Gotchya. I appreciate your explanation, that helps a lot.

Sorry to dwell on this, but I just want to make sure I'm asking the right question. One thing I mentioned in my original question is that in 2016 (our first year in business) we used the simplified home office deduction. There weren't any entries for our house on form 4562 or 8829, so is it safe to assume 2017 will count as the first year of depreciation on our home if we are entering our expenses instead of using the simplified office method again? Or does the simplified method still depreciate our house?

On a side note, while I was waiting on a response to my last question I experimented with entering the AC improvement both ways to see if either way affected my taxes more than the other. When I added the improvement to the cost basis it reduced my taxes by $27, but when I removed it from the cost basis and added it as a home office asset, it reduced taxes by $208..

Nevertheless, I really only care that I do everything correctly, regardless of how it affects my taxes.