Office in the Home -New Rules

[zeros]

Haven't heard much about this lately and not really familiar with the new rules. Does the $5 per square foot cover the depreciation also?

[ATSMAN]

Yes it Does

Haven't heard much about this lately and not really familiar with the new rules. Does the $5 per square foot cover the depreciation also?

Yes and 300 sq ft max. so a Max of $1500.

If the taxpayer files a Sch A then obviously full mortgage interest and real estate tax deduction can be taken on Sch A.

[buzzardbreath]

Depreciation not Mandatory

Not only is depreciation covered in the $5/sqft, but this means the taxpayer is no longer REQUIRED to take depreciation.

Under the old rules, if the house is sold, depreciation had to be recaptured. And this means depreciation allowed or allowable. If owners take the new method and sell their home, no depreciation will have to be recaptured for those years the new method was elected.

"...so ugly his mother had to take him everywhere so she wouldn't have to kiss him goodbye..." --from the rural south

[zeros]

Cost More on Self Employment Tax?

Yes and 300 sq ft max. so a Max of $1500.

If the taxpayer files a Sch A then obviously full mortgage interest and real estate tax deduction can be taken on Sch A.

Does the taxpayer have an option to deduct some interest and taxes on the OIH? Am I thinking correctly?

[ATSMAN]

Does the taxpayer have an option to deduct some interest and taxes on the OIH? Am I thinking correctly?

Not using this method. That is why I said if the taxpayer files Sch A they could deduct it there. But if they are taking standard deduction, no opportunity to deduct mortgage interest or real estate taxes.

[appelman]

Zeros raises a good point

People taking standard deduction probably won't have much in taxes and interest. But it could be a real deal breaker for many self-employed taxpayers, since they would lose the deduction of interest and taxes against SE tax. It sounds like you're going to have to run it both ways and compare, which sort of defeats the purpose of a "simplified" method. It reminds me a little of the post office's flat-rate boxes, where you are told that these are offered as a convenience; they may not result in the lowest postage.

Not using this method. That is why I said if the taxpayer files Sch A they could deduct it there. But if they are taking standard deduction, no opportunity to deduct mortgage interest or real estate taxes.

[ATSMAN]

Do the Calculation Both ways

Absolutely, depending on the size of the OIH, repairs, insurance, taxes and mortgage interest we must do the calculation using the trad method and the new simplified method and show the difference to the taxpayer. It is no big deal to do the trad trad method once it is setup in Drake. All you do is change the figures for the expenses mentioned above and Drake does the rest.

The issue is recapture of depreciation for CG purpose when the home is sold but with the exclusion amounts for MFJ it may not make any difference.

[appelman]

Say what?

Just to pick a nit, I don't believe the exclusion does you any good. The gain due to depreciation is not eligible for exclusion. If the taxpayer expects to sell the home at a profit in the foreseeable future, it might be best simply to ignore depreciation when making the comparison.

Absolutely, depending on the size of the OIH, repairs, insurance, taxes and mortgage interest we must do the calculation using the trad method and the new simplified method and show the difference to the taxpayer. It is no big deal to do the trad trad method once it is setup in Drake. All you do is change the figures for the expenses mentioned above and Drake does the rest.

The issue is recapture of depreciation for CG purpose when the home is sold but with the exclusion amounts for MFJ it may not make any difference.

[ATSMAN]

Just to pick a nit, I don't believe the exclusion does you any good. The gain due to depreciation is not eligible for exclusion. If the taxpayer expects to sell the home at a profit in the foreseeable future, it might be best simply to ignore depreciation when making the comparison.

Let do an example. MFJ. OIH 10% area. Original Basis for home $150,000 (avg price in my area). If they sold it for 300K
their CG would be 300 - 150 + 15 (assume fully depreciated) = 165K less than the current exclusion of $500K.

[appelman]

Not quite.

The exclusion would be 150K. The 15K would be taxable as unrecaptured Sec 1250 gain.

Let do an example. MFJ. OIH 10% area. Original Basis for home $150,000 (avg price in my area). If they sold it for 300K
their CG would be 300 - 150 + 15 (assume fully depreciated) = 165K less than the current exclusion of $500K.

[David1980]

Not only is depreciation covered in the $5/sqft, but this means the taxpayer is no longer REQUIRED to take depreciation.

Under the old rules, if the house is sold, depreciation had to be recaptured. And this means depreciation allowed or allowable. If owners take the new method and sell their home, no depreciation will have to be recaptured for those years the new method was elected.

"...so ugly his mother had to take him everywhere so she wouldn't have to kiss him goodbye..." --from the rural south

Could this be like claiming the standard mileage rate on a car where a part of the standard rate is considered depreciation?