Deducting Office w/Sch E income

[Lion]

In my town, an office can be in a residence if the office is under a certain square footage and no signage, parking, etc., visible from the street. But, it has to be a residence. So, that client's commercial use of a building would NOT be allowed in a residential area in my town. That's exactly why I asked about commercial zoning. Commercial use and commercial zoning have very much to do with one another.

[Gary2]

In my town, an office can be in a residence if the office is under a certain square footage and no signage, parking, etc., visible from the street. But, it has to be a residence. So, that client's commercial use of a building would NOT be allowed in a residential area in my town. That's exactly why I asked about commercial zoning. Commercial use and commercial zoning have very much to do with one another.

I have seen both "owner occupied" and "residential structure" as independent requirements for specific businesses in residential areas, meaning it could be one, another, or both.

But I guess my real point was that it's a mistake to draw a conclusion about the legality from the name of the zoning district. Just because a district is named "residential, single family" doesn't mean that this particular type of use is a violation. If you think it's a risk, check the local zoning laws or ask the local zoning enforcement officer.

[Gretel]

I would spread the total costs of the house including 39 year depreciation over the 10 rentals evenly. Zoning has nothing to do with the actual use. The question is about IRS law not any other law that might be violated. In office in home is located within a residential building but certainly needs to be depreciated over 39 years. This house is no different. Most bigger offices have kitchen space and certainly a bathroom, I do not see any problem with this fact either.

I have a client with about 10 rental complexes, each of them being there own LLC. Each of the LLC's gets an invoice about 4 times a year, that includes home office expenses, and is paid by the LLC to the owner.

[AZ-Tax]

Gretel, ProSeries procedure

I have a client with about 10 rental complexes, each of them being there own LLC. Each of the LLC's gets an invoice about 4 times a year, that includes home office expenses, and is paid by the LLC to the owner.

Gretel, I know you are a ProSeries user and I talked to PS tech support yesterday if there is a way I can enter the TP's office into the "asset entry wks" and have 1/10th of the current depreciation flow to each rental (Sch E) and they put me on hold for about 5 mins and came back and replied "no". When I entered the assets (rental houses), each asset has it own Depr Report. vs. all assets on one depr report. I cannot seem to find a way to open up another "asset entry wks" within PS that is not related to one of the Schedule E's. Gretel, do you know how? OR does your client file a schedule C?

[Uncle Sam]

Deducting Office w/Sch E income

I'm not a Proseries user - but why not spread the depreciation around to the 10 units (I assume it's 10) by entering the
applicable portion of the cost to each property? It's a headache to set up - but once it's there - it's done - and if a specific unit is sold - you've got the prorated cost already there also.

[Gretel]

I cannot seem to find a way to open up another "asset entry wks" within PS that is not related to one of the Schedule E's. Gretel, do you know how? OR does your client file a schedule C?

Just schedule E. Depreciation for home office done manually. You could create a dummy client if you have several items for the home office. That way you would have an software depreciation schedule that can be attached anywhere.

[FEDUKE404]

Deal with the facts and go forward

Gretel, I know you are a ProSeries user and I talked to PS tech support yesterday if there is a way I can enter the TP's office into the "asset entry wks" and have 1/10th of the current depreciation flow to each rental (Sch E) and they put me on hold for about 5 mins and came back and replied "no". When I entered the assets (rental houses), each asset has it own Depr Report. vs. all assets on one depr report. I cannot seem to find a way to open up another "asset entry wks" within PS that is not related to one of the Schedule E's. Gretel, do you know how? OR does your client file a schedule C?

Assuming you are first content with having the "office expense" divided equally among the ten properties (many people might choose to pro-rate instead based upon annual individual property gross income versus annual all properties income):

Somewhere outside of the actual tax return, such as even via a "dummy" return, I would do something along the lines of setting up a Schedule E showing the expenses of the 11th house as a "rental house" with zero income. You could also track historical/new depreciation, repairs, utilities, insurance, and etc. Then take that annual bottom line number and allocate it, in whatever way you wish, among the ten properties on the ten Schedules E appearing on the actual tax return.

I don't see any realistic way you could make this situation ever fit a office-in-home (Form 8829) scenario within the software. There are too many limitations/etc issues that might interfere with the calculations. You are likely looking at a line item entry on Schedule E, line 19 for each rental property. If all you care about is a running depreciation schedule ("office" only) then I assume you could hide such within a Sch A misc deductions, or a no- (or offsetting-) income Schedule C, but I would be extremely careful taking that approach....especially with efiling....because you just never know what is rattling around in the huge spreadsheet that is cleverly disguised as tax software.

In an ideal world, you must start with your pro-rated basis and set up ten individual depreciation schedules on the client's tax return. (If push ever came to shove, that could well be the "required" method. In reality, you do have "ten" depreciable properties to handle within the context of each rental asset!) But that could be messy, and once again dependent upon how you make the rental office expense allocations might create some issues with the (subject to variation) cost basis for the individual rental properties.

Bottom line: Think outside the box....we were not always slaves to software to figure out a solution for a client with an unusual situation!

FE

[Roberts]

The idea of spreading the cost between the other 10 properties equally - imagine what happens when he buys the 11th property next year. Then he sells 1 or 2 the third year. Seems like a system designed to produce headaches.

[taxea]

1. imo there is no way he can justify the entire house as an office even if he had a realtor license. He has to allocate the sq ft area used for office and storage against the entire sqft of the building. This would apply to depreciation as well as expenses for maintaining the building.

2. if he doesn't meet clients at the office then I would not include any landscaping, or outdoor maintenance or upgrades.

3. maintenance and upgrade expenses should be limited to the office and storage areas.

4. how many hours a day does he spend in the office. That would have to be considered and allocated from the deprecation as well.

He probably would be better off moving in or creating an office and storage area at his residence and renting this.