What construction costs can I deduct for garage conversion to home office?

[Aquarius5]

We had a detached garage that we had converted to a dedicated pilates studio for my pilates business. I see all my clients there regularly so it definitely qualifies as a home office.

As part of our home office deductions this year, can we deduct the entire expenses to convert the garage to the pilates studio? We had a general contractor do all the work and it came to around $40,000.  We are reading differing points of view such as:

1. Yes: If you already have the space as part of the home, turning it into a home office is more a matter of remodeling than building. The costs of doing such a remodel are 100 percent deductible .
2. No: You can only add the cost of the project to the basis if your home and indirectly depreciate it via home depreciation deduction. (which you will have to pay back when you sell the home)

Note that this was existing structure, that we simply remodeled for the purposes of strictly using it as a home office for the business. It is a detached structure, but it is on the same utilities (electricity/gas) as the home.

[JohnB5677]

Since this is a separate structure, and not attached to the house, all of the expenses are direct expenses and they all can be deducted either through adjustment to Basis, or direct expense.  You must then allocate the space between the home and the office.

IRS Publication 527 states:

Additions or improvements.

"Add to the basis of your property the amount an addition or improvement actually costs you, including any amount you borrowed to make the addition or improvement. This includes all direct costs, such as material and labor, but doesn’t include your own labor. It also includes all expenses related to the addition or improvement."

[Aquarius5]

Thanks @JohnB5677 ! To clarify, everything you mentioned would be deducted over the course of many years in the form of depreciation / depreciable assets because it's an improvement to the home, correct?

That is my main question here, what home office renovation expenses do we draw the line between regular expense vs depreciable expense.

If I have a home office and hire someone to re-paint the walls that doesn't seem like a depreciable expense. If I hire someone to change the flooring to a new type that is required for my business needs that doesn't seem like a depreciable expense. These are cosmetic changes, not improvements to the home. So I'm confused when do we label a home office alteration as regular expenses vs depreciable expense.

[AbrahamT · Accepted solution]

So here's the deal. If it is deals with  cosmetic changes or changing the flooring or painting, then that is correct, You may simply expense it in the period that these expenses took place. However, if it is a situation like you explained above where you are doing major construction to bring your garage to a state of suitable for a home office, then adding it to the cost of

the home and adjusted for depreciation according based on the home office percentage.