Can I deduct construction expenses for an addition so I can convert an existing bedroom to a home office? What if the office is in the new construction?

[mahendricks]

I am building an addition to my home so that I can convert an existing bedroom and bath into an office for my private practice.  What design, construction and renovation costs can I deduct?  Would the rules be different if the new addition housed the office?  

[Hal_Al]

Either way, you may not deduct any of the construction cost.

The portion of your home office deduction, attributable to the building structure, comes from depreciation. You add the construction cost to your home cost  basis ,divide that by 27.5 years, and multiply that by the square foot percentage used for the office. The calculation is the same, whether you you use the new space or old space.

If you constructed a free standing building, as opposed to an addition, the  answer would only be slightly different. You depreciate only the new structure.

[Happyinpink00]

Could you further elaborate on the scenario:

You have a current home office and you deducted Year 1 in 2018, but in 2019, you added square footage.  Do you then deduct in Year 2 with the new square footage or you would deduct Year 1 with the old square footage and Year 1 with the new square footage (two assets?)

[sprinks]

"Home office depreciation is almost always calculated using a 39 year recovery period. A 27.5 year recovery period can be used for home office depreciation however by an on-site landlord of a building in which at least one dwelling unit is rented out and 80% or more of the gross renal income is rental income from dwelling units within the building."

This is a complicated subject, more at: Expenses Related to Your Home Office Are Deductible (bizfilings.com)

[Carl]

You have a current home office and you deducted Year 1 in 2018, but in 2019, you added square footage.

In your case, this changes the percentages of what you can deduct and depreciate on the SCH C. There are several ways to do this. The simplest way is to close the old home office. Then open a new home office with the new, larger square footage. Take note that the dates can not overlap. For example, the closing date of the old home office "MUST" be at least one day before the opening date of the new home office.

You will need to keep a record of all depreciation taken on the old home office, and keep that record forever. You will be required to recapture that depreciation when you sell or otherwise dispose of the property in the future.

Finally, assuming this is a SCH C business we're discussing here, depreciation is over 39 years, not 27.5. The lesser is only for rental property scenarios.

[Anc2032]

If I’m adding a separate space to my home to use as a home office, can I use the business to pay for it? Or deduct it at the end of the year?

[Carl]

If I’m adding a separate space to my home to use as a home office, can I use the business to pay for it? Or deduct it at the end of the year?

Unless you are "in the business" of buying and selling real estate, it's not deductible per-se. Basically, real estate used in the production of income on a continuing basis is an asset that gets depreciated over time.  Regardless of weather you pay for it with business funds or personal funds, the cost is depreciated over time. For a home office it's depreciated over 39 years.

Typically, whatever you pay to add on to your existing primary residence adds to the cost basis of that primary residence as a whole. That cost basis has nothing to do with your business and nothing do to with how it gets paid for. If the add on to the structure is used 100% for business then while the cost still adds to the total cost basis of the house as a whole, you can also depreciate that actual cost of the add-on over 39 years.

Also understand that depreciation is not a permanent deductions. At some point that depreciation has to be accounted for.

For example, if you sell the property in the future then all depreciation taken is recaptured and taxed in the tax year you sell the property. Two things happen with recaptured depreciation.

1) Recaptured depreciation is added to your AGI for the tax year you sell, and has the potential to bump you into the next higher tax bracket. Weather that happens or not just depends on the numbers.

2) Recaptured depreciation is taxed anywhere from 0% to a maximum of 25%.  But again, what tax you pay on that recaptured depreciation depends on the numbers.

Some may have the impression that if they don't depreciate the asset, then they don't have to recapture and pay tax on it. That's just not so. When you sell the property you are required to recapture the higher of the depreciation taken, or the depreciation you *should* have taken. So if you don't depreciate the asset it's like a double-whammy when you sell the property. Even worse if your state also taxes personal income and requires you to depreciate business assets.

[Opus 17]

You can list your home office as a business asset and depreciate it.  The depreciation period for business property is 39 years.  This is (more or less) how you recover the cost over the life of the property.  If you aren't in business at that location for the next 39 years, you only recover the portion of the cost that corresponds to your time using the property in business.

The basis for depreciation is the cost to build or the fair market value at the time you place it in service, whichever is lower.  If not all the construction costs can be assigned to the business space, you can only list the pro-rated cost of the portion used for business.  

Then, if you have a home office, you can also deduct as expenses, a pro-rated share of your property taxes, homeowners insurance, and utilities, based on the square footage occupied by the business.