How to handle home office improvement deductions/depreciation when closing business

[firetiger]

In 2020, I:

• made $25K income in a sole proprietorship (software development)
• spent $20K building an external structure to use as a home office
• decided to close the business
• qualified to take the "Safe Harbor Election for Small Taxpayers" (I think)

Can I deduct the $20K home office improvement costs? If not, what is the proper way to handle them?

If I depreciate over 39 years, but then close the business the same year, do I need to do anything about the unclaimed depreciation? 

[ThomasM125]

Normally, if you purchased an asset but later closed the business, you could write off the undepreciated balance of the asset against business income in the year it ended. However, in this case is sounds like you are merely converting the improvement to personal use, as the office is a part of your residence now I believe?

If so, then you would not deduct the remaining depreciation on the improvement, since you converted it to personal use. The only possible claim you could make is that it is worth less as a personal asset than a business asset, so you could possibly write off the difference between the undepreciated value and the fair market value of the property, but that would be hard to substantiate.