Can I Depreciate Construction Costs and also take the Simplified Home Office Deduction of an office built next to my house?

[kevin2]

We are building an office next to the house.   It fits all the usage requirements for a home office.    If we depreciate the construction costs to build it, can we still take the home office deduction using the square footage?   If not in the year of construction, how about future years?

[Carl]

What you're describing to me, sounds like double-dipping. You can't do that. You have two ways to do this.
 - If this building is a separate structure and that building will be your home office with 100% business use, you can add it as an asset to your property with 100% business use and it will be depreciated over 39 years.
 - The other thing you can do is add the cost basis to the cost basis of your entire property. This can NOT be depreciated. It just increases the cost basis of your property. Then you have to refigure your total square footage, since this "addition" increased it. Then the percentage of that new higher total square footage used for the "home office" (which is the new building) is used to figure your home office deduction.
 Once you select a method, you can not change it later down the road. But either way you go, you will be closing the old, existing home office first. Then the next day, you open your "new" home office.

[TaxGuyBill · Accepted solution]

As Carl said, you can not depreciate it and use the Simplified Method for your Home Office Deduction in the same year.

Because of the large cost of building a separate structure, the I suspect the Actual Expenses (with depreciation) will give you a better deduction.  Depreciating 100% of the new structure would be easiest and most accurate.

[Carl]

that's what I would do. But I'd have to look at the pre-construction cost-basis and the after construction cost-basis to determine which method would be best. I would expect the latter of my above, because adding more floor space actually reduces the percentage of office space I can claim for the home office deduction. It would depend on how much the after construction increased my cost basis, as to which method I would choose.

[kevin2]

Yes, I guessed the same about the double dipping - but Just to clarify something Bill mentioned, and the second part of my question:  Does depreciating 100% of the construction cost eliminate the ability to use the home office deduction in Future years?

[TaxGuyBill]

No.  When I said "depreciating", that means the cost is spread over 39 years.  You depreciate 100% of it because it is all your home office, as compared to depreciating a percentage of your home.

For example, let's say the entire home cost $200,000, and the new structure costs $20,000.  Rather than depreciating PART of the $200,000 cost (based on square footage) over 39 years, you would depreciation ALL of $20,000 over 39 years.  The end result would basically be the same, but it is more accurate to depreciate the entire new structure, rather than PART of the combined total of both buildings.

Does that clarify it?

[kevin2]

That clarifies a lot!

[Carl]

I would suggest you test it both ways, and see which gives you the bigger deduction. If your construction cost increase your "per square foot" cost for the entire structure (new and old combined), then the percentage of total square footage method "could" give you the bigger deduction. It depends on the costs, when you get down to brass tacks.

[kevin2]

You're right, and I will.  Another issue I need to look at is recapturing this depreciation when it is time to sell the property.   I noticed on another post in this forum that an office in a separate building instead of in the house (say, a repurposed bedroom) is not an advantage in this regard when the house is sold.

[Carl]

When it comes to depreciation recapture, it really doesn't matter because you will pay taxes on that when you sell the property. Since I'm legally required to take depreciation, I actually prefer to keep that deprecation amount required each year as small as possible.