Renting to employer

[JG EA]

I got help a while back on this subject. The garage was detached so I concluded that it was OK to depreciate and all.

Change of plan:

Well, the TP plans to sell his home. If we "elect" to just claim the portion of interest and taxes, will that exclude this piece from 'separate portion sold as a business' when he sells his home?

If not

Will it help to show some personal use of the garage?

Or if none of this works can I just count the rent on line 21 and not have it be business property?

[Snaggletooth]

Consistent

If you have already filed a return treating the garage as business property, you should stick with it, including reporting the sale. Flip-flops on the part of the client should not undo what we have reported as facts.

If nothing has been filed, then the garage is either business property or it is not. You may have arguments to support either, but you cannot pick and choose what kind of deductions to take. For example, if garage is business property then it is depreciable whether you take depreciation or not. And recaptured when garage is sold.

Fickle planning on part of the client (if this is a fair assessment) should be their problem and not yours.

[erchess]

Not sure I remember the original thread

but reading between the lines I think I see as follows. Your client owns and resides in a house that is subject to a mortgage and all the expenses familiar to tax professionals and home owners. The house has a detached garage. In the garage in 08 the client set up a work space to use in connection with his employment. (Not sure if the whole garage was given to this but of course it doesn't matter as long as you know the square footage of the total house including any personal space in the garage and of the area regularly and exclusively used for business and all the details about when he set up the home office and how long he maintained it.) His employer paid him FMV rent for the home office and did not put or is not going to put the rent in box one of his W2. You were happily going to let this arrangement continue and claim the rent on SCH E and depreciate the home office and write off other expenses there. Now things have changed and in 09 the house will the client hopes be sold. DO I HAVE THE FACTS STRAIGHT?

Assuming that I do, here goes. I think I am in total agreement with Nashville. If the client made personal use of the "home office" after setting it up as a home office or if indeed he did not use it "regularly and exclusively for the employer's convenience" then it is not a "Qualified Home Office" and has no tax consequences. There would be no depreciation to claim, no write offs of expenses on SCH E and no reason I can see not to put the rent on line 21 especially if rent is not expected to be a recurring item on his returns. If on the other hand he has a "Qualified Home Office" then he benefits in 08 from putting the rent on SCH E and claiming the other expenses including depreciation because when he sells the house the rule will be "depreciation allowed or allowable". Neither your name nor the client's name is Timothy Gertner or am I mistaken?

Therefore as an Ethical Professional going by the book you need to ask the questions about regular and exclusive use of the "home office" without any hint to him that you prefer some answers to others or that some are better for him than others. It would be prudent to keep a record of exactly your questions and his answers and you must be guided by them.

[JG EA]

No flip flop

If nothing has been filed, then the garage is either business property or it is not. You may have arguments to support either, but you cannot pick and choose what kind of deductions to take. For example, if garage is business property then it is depreciable whether you take depreciation or not. And recaptured when garage is sold.

Snaggletooth,I dd research this summer (fall?) on how to do this rent he started receiving from his employer. He had called and asked me about it and at the time he called I only told his that it would be taxable and I would research expenses. After the fine posts and reading the IRS info I decided that if it was detached it could be - all expenses and depreciation, etc.

However, in our recent interview the client talked about his intentions to sell. I explained how if we count this garage as a rental then that part of the sale will be taxable. I then (remember this is the time we are actually discussing the whole thing) asked him if he had any personal use of the garage. He said yes. So, I had the bright idea that if we treated this as an employer/employee rent like the OIH, maybe it would have the same treatment - to report with just int/taxes. And because of part personal use there would be limited expenses anyway. So I thought if it was just % of int/taxes it might work.

I know it is what it is and if we have to count it as separate when sold we will. Just trying to figure it out.

Assuming that I do, here goes. I think I am in total agreement with Nashville. If the client made personal use of the "home office" after setting it up as a home office or if indeed he did not use it "regularly and exclusively for the employer's convenience" then it is not a "Qualified Home Office" and has no tax consequences. There would be no depreciation to claim, no write offs of expenses on SCH E and no reason I can see not to put the rent on line 21 especially if rent is not expected to be a recurring item on his returns. If on the other hand he has a "Qualified Home Office" then he benefits in 08 from putting the rent on SCH E and claiming the other expenses including depreciation because when he sells the house the rule will be "depreciation allowed or allowable". Neither your name nor the client's name is Timothy Gertner or am I mistaken?

Erchess, these are helpful thoughts. I am not getting Gertner reference.

[Snaggletooth]

For JG

Mornin' JG, did not mean to insult anyone's knowledge, especially yours (which has often been a source of good information for me).

Sometimes the mentality of the client bleeds through into a question, and this may have been what happened. They want their cake and eat it too. And the only way to counter this thinking is to take facts which are obscure and break them down into clear distinction of black and white, if possible. Thus the statement, "it is either business property or it is not."

And I do think you may have a good example. TP does not want office-in-home treatment because structure is detached. He can thus make an allocation of interest and taxes, but the structure is depreciable (whether he chooses to do this or not).

Now comes time to sell, and he is confronted with capital gains on the sale of that portion of the property. All of a sudden we are finding out that the detached structure has personal use associated with it.

That is the kind of thing I'm talking about. I encounter this sometimes from my own clientele, when I ask them a question and their response is, "Which answer gives me the less tax?"

[JG EA]

I was fine, but just felt the need to explain. Thanks for your thoughts!

[veritas]

On page 6-22 of TTB

You will find information relevant to your question.

Use test met for business part (no business use in year of
sale). The gain allocable to the separate part of the property used
for business or rental purposes can be excluded if the taxpayer
has owned and used that portion of the property as a primary
residence for at least two years during the 5-year period prior
to the sale. If there is no business use in the year of the sale, the
sale is treated as a single sale. No allocation of gain is required
and any gain that must be recognized (due to post-May 6, 1997
depreciation) is not reported on Form 4797.

However I see reference to an employer paying rent? Doesn't 280A forbid taking deductions for an office at home rental for an employee?

[JG EA]

You will find information relevant to your question.

Use test met for business part (no business use in year of
sale). The gain allocable to the separate part of the property used
for business or rental purposes can be excluded if the taxpayer
has owned and used that portion of the property as a primary
residence for at least two years during the 5-year period prior
to the sale. If there is no business use in the year of the sale, the
sale is treated as a single sale. No allocation of gain is required
and any gain that must be recognized (due to post-May 6, 1997
depreciation) is not reported on Form 4797.

However I see reference to an employer paying rent? Doesn't 280A forbid taking deductions for an office at home rental for an employee?

That was not what I was asking. I've had a failure to communicate. I did read. I read IRS material, TTB, etc.I didn't want to take expenses beyond what was allowed. This is not an OIH. I shouldn't have made a reference to it. It was a question about "like" an OIH. I will be more careful and word my posts better.

[Jesse]

Sometimes failure to communicate can be a good thing as it brings out questions and gives information we didn't think to ask but might end up needing. Sometimes it frustrates other posters.

Anyhow, I recalled a similar topic comming up before as to whether it is really a seperate structure or part of your home so I found this thread:

http://www.thetaxbook.com/forums/showthread.php?t=2506&highlight=seperate+structure

If it helps great - if not please don't be insulted and just ignore my post.

P.S. Birdlegs is truly missed

[veritas]

Ok

What was the detached building used for by the employee?

Secondly, I had an instance where a detached building was used in a client's business. However in the year he sold his property it was no longer used for business so he was not required to report it as a business asset sale.

Wasn't that a question you had? Whether your client had to report the sale of the detached building as business property? I posted the excerpt for you in case it was an option.

[JG EA]

Thanks very much for your posts and putting up with my incoherence. January is hard. Getting into whole routine.

I appreciate your posts and help. I am done with the return and did what I thought was correct, but I promised the client we would review it all ATS and if there is any reason to change it I'll amend it for him no charge.

So I may bring this up again (you hope not).

Jesse,

If it helps great - if not please don't be insulted and just ignore my post.

It is a good thread - and I am not insulted at all.
Veritas,
I'll answer those questions later maybe. But for now it is on the side burner. Thanks for posting.

[Jesse]

January is hard. Getting into whole routine.

Ain't that the truth!