Home Office Depreciation-Should I Update Basis?

[Rondi]

My client has a home office for which we have been taking depreciation since 2005. In 2013 they spent 25,000+ in a kitchen remodel. They do not use the HO to meet clients--it is purely for administrative use that qualifies it as their principal place of business.

So should the basis be increased by the cost of the improvements, or would you continue on with the original basis since the kitchen really has nothing to do with the office or the administerial functions?
Thank for helping me determine how to handle!

[mammondee]

Have you considered converting him to the new "simplified" method, and avoiding the issue all together?

[taxea]

no it is not part of the office. If they upgrade the office that could be taken. The kitchen remodel is stretching the purpose of a home office.

[Rondi]

Thanks!

no it is not part of the office. If they upgrade the office that could be taken. The kitchen remodel is stretching the purpose of a home office.

That's what I figured, but just wanted to get another opinion. And yes, I will run the #'s for actual and the safe harbor. Thanks! :-)

[Roland Slugg]

Yes, adjust the basis. Depreciation of the portion of the home used as an office is dependent on just two factors: (1) the percentage of space used as an office compared to the entire house, and (2) the depreciable basis of the entire home. Item "(2)" was just increased.

If money had been spent improving only the room used as an office, the result would be similar. The amount spent improving the office portion would add to the home's overall basis, of which the office percentage would remain the same, resulting in a small annual increase in depreciation.

If the new "simplified" method produces a greater deduction, the entire point is moot.

[taxea]

Roland if the preparer does not meet clients in the OIH then there is no OIH use of the kitchen. This would be like deducting all their meals because they work in an office and have to buy lunch out. I still think this would be pushing the concept of a home office.

[Roland Slugg]

Taxea, your follow-up post was a total non sequitur.

Roland if the preparer does not meet clients in the OIH then there is no OIH use of the kitchen.

There is no OIH use of the kitchen whether the preparer meets clients in his home office or not. The kitchen is irrelevant.

This would be like deducting all their meals because they work in an office and have to buy lunch out.

Huh??????

I still think this would be pushing the concept of a home office.

You are perfectly free to think whatever you like.

[jsamans]

TTB: The basis for home-office depreciation does not change.

I was inclined to agree with Roland. After all, what if your client sold his or her home and then bought it back? Clearly, the basis used would be the basis of the improved property -- kitchen and all -- regardless of whether those amenities were used by the business.

But it turns out that TTB 5-16 addresses this very situation, and Roland and I are wrong:

• Permanent improvements made to a home before a home office is established within it are added to the basis of the home in calculating the inclusive depreciation for the property itself.
• Permanent improvements made to a home after a home office is established within it are depreciated as separate items on the basis of their business-use allocation, only if the improvements affect the business-use area.

So, Taxea had it right: because the kitchen is not part of the home office and does not affect the business use of the home, the basis for the home-office depreciation remains unchanged.

[taxea]

I was inclined to agree with Roland. After all, what if your client sold his or her home and then bought it back? Clearly, the basis used would be the basis of the improved property -- kitchen and all -- regardless of whether those amenities were used by the business.

But it turns out that TTB 5-16 addresses this very situation, and Roland and I are wrong:

• Permanent improvements made to a home before a home office is established within it are added to the basis of the home in calculating the inclusive depreciation for the property itself.
• Permanent improvements made to a home after a home office is established within it are depreciated as separate items on the basis of their business-use allocation, only if the improvements affect the business-use area.

So, Taxea had it right: because the kitchen is not part of the home office and does not affect the business use of the home, the basis for the home-office depreciation remains unchanged.

Thank you Jamie

[Rondi]

Thank you

I see that now....not sure how I overlooked it. Thank you all for taking the time to help!