How to add a home improvement in TurboTax Home and Business as an asset to increase the basis of my home property

[pizzasman]

Hi,

In 2022 I completed a bathroom remodel. 40% of my home is used for a home business, since 2007. The remodel is considered a home improvement, not repair, so I can not apply the costs for the remodel as an business expense. TurboTax Home and Business help states I need to add the costs as an asset, but it does not state how or what type of asset. I only know how to add business assets in TurboTax, how do I add a home improvement asset (capital improvement?). 

I'm trying to understand the basis for my home property.  While in TurboTax Home and Business 2022, I was reviewing the forms and started looking into form 8829, and associated worksheets. Looking at form 8829, line 1 states "Description of asset.." as "Home Office" , line 2  "Date acquired..." lists the date my house was purchased in the 90's, line 3 "Date placed in service"...  which was 2007, and line 4, "Enter the total cost when asset was acquired...", which lists the cost of my house in the 90's. 

I guess this information was created when I first started using TurboTax and line 4 of form 8829 is the cost basis for my house.  Should I have used the evaluation of my house when I first activated the house portion as a home business (8829 line 3) in 2007 or was I accurate in using the house purchase cost in the 90's? Since then, I've made numerous improvements which I learning now, I should have included as an asset? Will adding the home improvements as assets adjust my home cost basis? 

[PlatinumPlatypus]

You asked a question that can be complex to answer, 

The depreciable basis of a personal asset used in business is the lesser of its fair market value or its adjusted basis on the date it is placed in service as a business asset. For a house purchased in the 90's that's very likely to be its adjusted basis. Adjusted basis is properly computed as the purchase price plus the cost of improvements that increased either the life of the building, the market value of the building, or the building's suitability for business use, plus other costs incurred to continue to hold title to the property that were not eligible to deduct from income when paid.  Eligible only means you could have claimed a deduction, whether you actually took that deduction or not.

   Your adjusted basis is purchase price plus what you paid for the home improvements. What you paid to repair wear-out items like paint and roof requires an extra step. You usually have to figure out how much betterment there was by subtracting the value of the paint or roof when you bought the house before adding the cost of a replacement. E.g. if a roof lasts 20 years and you had to re-roof after 5 you bought a house with 5 years of roof life so you subtract 5/20ths of the cost to re-roof the year you bought the house (make a reasonable estimate) before adding the cost to re-roof. If you re-roofed twice after you bought the second re-roofing adds but the first re-roofing is a little trickier. That roof would both add and subtract and have no effect if it lasted the full expected life, but if it failed prematurely for some non-deductible reason like defective material made by a manufacturer that went out of business, you subtract only the fraction of the expected service that the roof actually gave times the cost. The preceding discussion has assumed an equivalent roof, if  you replaced a roof with one that lasts substantially longer or protects the building differently increasing its life, or is more aesthetic and increases the value of the house, you could add the cost of the roof to the cost basis without considering the cost of the roof that was replaced. There are other specific circumstances that can make a carrying cost an adjustment if it wasn't deductible. For example if this was a second home in years when real estate taxes or mortgage interest on a second home home wasn't deductible they can be capitalized as an addition to the cost basis because paying those costs is necessary to continue to hold title to the property. Other costs like heat that are still necessary for a unoccupied building can be capitalized as a carrying cost for an unoccupied building, but not an occupied building. 

    IRS Publication 551 Basis of Assets has somewhat better coverage of adjustments that reduce costs basis and adjustments not allowed than guidance about common adjustments that increase cost basis. Property and its cost are controlled by state law. Federal law's effect is limited to modifying cost for the income tax purpose by removing from tax cost amounts that either already have been, or could have been, excluded from taxable income if the taxpayer hadn't used the standard deduction. I can't tell you if the proper  treatment for deductions subject to the 2% AGI floor is to capitalize pro-rata using the portion of all such deductions, of if they were deductible even though claiming the deduction had no effect on taxable income. The recently enacted dollar amount caps and this-or-that-not-both for state and local income tax, property tax and mortgage interest deductions more certainly have the effect of making specific carrying costs ineligible as deductions from current income and adjustments to the cost basis when dollar capped, but the uncapped either-or can be argued, insincerely, to have been an available deduction, or literally as owned by the larger which isn't ascertainable when both are capped. In the absence of an authoritative determination try to do the right thing. If you make an allocation of the allowed deduction proportional to the amounts deductible if they were unrestricted; the IRS may still find that interpretation to have been flawed but since a sincere effort to make a reasonable calculation that happens to be in error isn't subject to any penalties, the amount due will be the tax that was due with interest.
    Adjustments to basis that were not made in the past that should have been made can still be made. Not making adjustments to basis that should have been made is treated by the IRS as having used an unauthorized accounting method, an error that is corrected by using an authorized accounting method instead. Form 1315 "application for change in accounting method" is free to file for changes that are automatically approved, which includes changing from an unauthorized accounting method to an authorized method . You can change multiple past year errors using one form 1315. File it if you decide to file amended returns after adjusting the basis for past tax years. If amended returns for past years would recover an overpayment for prior years too small to justify the effort, then as a practical matter you're likely to be the only one who either notices or cares that going forward you adjusted the depreciable basis because of a cost in the past instead of the present and whether you file form 1315 or not won't matter. You're only dinged for an honest error when you've underpaid the tax due, not when you've overpaid. If you simply make the adjustments to basis and use the adjusted basis going forward and the IRS squawks, file form1315 and amended returns as appropriate.
NB: Each home improvement made after the home office is placed in service should be depreciated as a separate asset. 

NB: You may want to correct "prior years depreciation" for the home office when there are errors in past depreciation. TurboTax doesn't accumulate it. TurboTax assumes it can be computed from the inventory cost and date placed in service, and most often that's the correct approach. When you are entitled to a (larger) deduction and fail to take it , that's on you, don't adjust for it, but when the home office expense deduction is limited by the profitability of the business, you weren't entitled to the depreciation deduction so you do adjust for it. Similarly, if you change the fraction of the home used for the home office TurboTax will compute prior depreciation as if the current fraction was always used. You don't have to (eventually) pay more capital gains tax on the sale of the home using an inventory cost reduced by depreciation you couldn't take a deduction for.  Likewise, if you stay in the house long enough TurboTax will reach the end of the depreciation recovery period without considering those years when no cost recovery was allowed. The recovery period only determines only the rate of recovery, depreciation ends when the total recoverable amount is reached. This may be confusing when the fraction of the home used for the home office decreases because some of the prior depreciation applies to a different part of the home. It may be simpler to depreciate distinguishable areas used for the home office separately.

[Carl]

For starters, if the bath room itself is 0% business use, I would not bother with this. Remember, depreciation is not a permanent deduction. All depreciation taken is recaptured and taxed in the tax year you sell the property. Two things about depreciation recapture most do not think about.

1) Recaptured depreciation is added to your AGI in the tax year you sell the property.

2) The increased AGI has the potential to bump you into the next higher tax bracket. Weather it actually does or not just depends on the numbers.

However, if you want to start depreciating the increased cost basis, I don't see any reasons why you can't. It may be simpler than you think. If you remodeled an existing bathroom, lets use the following numbers for simplicity.

Cost basis of house when you originally purchased it:  $100,000

Forty percent of that would be $40,000 and that is what is being depreciated if 40% of your floorspace is used for business.

Bath remodel costs $10,000.  So your adjusted cost basis for the house is now $110,000.

Forty percent of $110,000 is $44,000.

So you have an additional $4,000 to start depreciating.

Enter it in Turbotax not as a home office, but as a business asset in the Business Assets section. It would be classified as real estate property, non-residential real estate.  For description I would call it something like "Remodeling".  Cost would be $4000 and Cost of Land would be 0% since nothing changes on the land front. Date purchased/acquired would be the date the project was completed.

Select "purchased new" and "used 100% for business" and the date you started using it would be the date the project was completed.

On the summary screen you can elect to see the details and note that it's depreciated over the next 39 years with 2022 being the first year of depreciation. Note the amount of depreciation for that first year depends on the date it was placed "in service".