Should I Really Depreciate My Home?

[LittleScholars]

Last year I read all of Tom's tax books in preparation for my first year being open for business. I had planned on depreciating my home because that's a large write-off and my accountant said I should not. Her thinking was that if we ever sell our home (and, who knows, maybe one day we will) we will owe a ton in capital gains taxes.

I don't know enough about either side of this to make a decision. Any thoughts?

[TomCopeland]

home depreciation

Last year I read all of Tom's tax books in preparation for my first year being open for business. I had planned on depreciating my home because that's a large write-off and my accountant said I should not. Her thinking was that if we ever sell our home (and, who knows, maybe one day we will) we will owe a ton in capital gains taxes.

I don't know enough about either side of this to make a decision. Any thoughts?

Your tax preparer is crazy and if you follow his advice you will lose thousands of dollars of tax deductions while you are in business. The short answer is this: When you sell your home you will owe taxes on the depreciation you claimed while using your home for your business. But, if you don't depreciate your home, you will still owe tax on the amount of depreciation you were entitled to claim, even if you didn't claim it. So there if you don't depreciate your home you will lose a big deduction each year and still pay the same amount in taxes when you sell your home. IRS Publication 523 clearly states this. See my article: http://tomcopelandblog.com/should-yo...iate-your-home

Also, here's what the IRS Child Care Audit Technique Guide says:
Sale of Home

A capital gain issue may arise if the provider/owner sells the residence (home) in which he or she operated a business and depreciation deductions were allowed or were allowable. All or a portion of the gain on the sale of the home may qualify under IRC Section 121 to be exempt from taxation if the provider meets certain requirements discussed below. However, IRC Section 121(d)(6) provides that the exclusion provided under IRC Section 121 does not apply to any gain from the sale of a principal residence attributable to depreciation adjustments (as defined in IRC Section 1250(b)(3)) allowed or allowable for periods after May 6, 1997. Therefore, a provider/owner who used part of his or her home for business purposes may not exclude any gain from the sale of that residence that is attributable to depreciation adjustments taken or allowed for periods after May 6, 1997.

If the business is conducted within the primary residence structure, then the gain, except for depreciation allowed or allowable, can be excluded if the provider/owner meets certain requirements, including the time and ownership test discussed below. If the business is conducted in a structure separate from the personal residence, then the portion of the gain allocable to that structure would not qualify under Section 121 for exclusion unless the provider/owner can show personal use of the structure that meets the time and ownership test. An allocation between the separate business use structure and the personal residence structure is required. (IRC Regulation 1.121-1(e) and Publication 523 provide more information and examples relating to this issue.)

Show this to your tax preparer. If he still won't depreciate your home, quit him and get another tax preparer. This is such a big deal that you can't afford not to claim house depreciation.

[LittleScholars]

Your tax preparer is crazy and if you follow his advice you will lose thousands of dollars of tax deductions while you are in business. The short answer is this: When you sell your home you will owe taxes on the depreciation you claimed while using your home for your business. But, if you don't depreciate your home, you will still owe tax on the amount of depreciation you were entitled to claim, even if you didn't claim it. So there if you don't depreciate your home you will lose a big deduction each year and still pay the same amount in taxes when you sell your home. IRS Publication 523 clearly states this. See my article: http://tomcopelandblog.com/should-yo...iate-your-home

Also, here's what the IRS Child Care Audit Technique Guide says:
Sale of Home

A capital gain issue may arise if the provider/owner sells the residence (home) in which he or she operated a business and depreciation deductions were allowed or were allowable. All or a portion of the gain on the sale of the home may qualify under IRC Section 121 to be exempt from taxation if the provider meets certain requirements discussed below. However, IRC Section 121(d)(6) provides that the exclusion provided under IRC Section 121 does not apply to any gain from the sale of a principal residence attributable to depreciation adjustments (as defined in IRC Section 1250(b)(3)) allowed or allowable for periods after May 6, 1997. Therefore, a provider/owner who used part of his or her home for business purposes may not exclude any gain from the sale of that residence that is attributable to depreciation adjustments taken or allowed for periods after May 6, 1997.

If the business is conducted within the primary residence structure, then the gain, except for depreciation allowed or allowable, can be excluded if the provider/owner meets certain requirements, including the time and ownership test discussed below. If the business is conducted in a structure separate from the personal residence, then the portion of the gain allocable to that structure would not qualify under Section 121 for exclusion unless the provider/owner can show personal use of the structure that meets the time and ownership test. An allocation between the separate business use structure and the personal residence structure is required. (IRC Regulation 1.121-1(e) and Publication 523 provide more information and examples relating to this issue.)

Show this to your tax preparer. If he still won't depreciate your home, quit him and get another tax preparer. This is such a big deal that you can't afford not to claim house depreciation.

Oh my goodness, I am SO glad I asked! It really is thousands we would be losing. This year I don't owe as much as I will in future years because I'm so new, but this is great. Thank you!