Home office or not

[Bees Knees]

You miss interpreted my 160 acre comment. Why would your client WANT 160 acres to qualify as a residence in the context of Section 280A? Its the other way around. You DON'T want 160 acres to qualify as your residence, because that means any business conducted on it falls under the Section 280A limits.

A farmer does not want his 160 acres to qualify as his residence, otherwise he could not use his insurance and depreciation deductions on his buildings to add to his farm loss.

Code Section 280A limits your business deduction for using your residence in your business. You can't just decide your residence is also your business, and then ignore Section 280A. The limitation is there because it IS your residence. So by default, if your business also happens to be located on the same property as your residence, it is limited. EVEN a separate structure, such as a pole barn is limited because the code says it is limited.

It is not the taxpayer's choice. It is the law.

Now why is it different for a farm? Because a farm operation along with its buildings is not considered the same as your residence. The farmer claims that due to the size of his acreage, his farm house is located on different property than his barn and fields and such. Being located on a separate piece of property then means his losses are not limited by code Section 280A. I'm sure the IRS would love it if the farmer claimed his entire 160 acres were part of his residence. But have you ever seen a court case where a farmers losses were limited under Section 280A?

[OldJack]

You misunderstood my comment about clients with large acreage as residence. They do NOT farm, do not USE the land as a farm because they use the land as their residence and when they sell the 160 acre house and land the gain will be excluded under §121. If they are not farming why would they want the land sale taxed as a farm business?

You automatically think in terms of it being a farm simply because it has a larger yard than you think it should have. A taxpayer is not required to be a farmer simply because the land is in a farm community and land that can or has in the past been farmed by others. Cutting ones grass (for a personal use horse) is not farming unless you are cutting it and selling it for gain.

Code §280 indeed limits the loss of home property used for business but it does not limit §1231 business property losses. Note that before the §121 exclusion of gain the IRS position, evidenced by court cases, was that your bedroom office in the home was §1231 business property (and §1250) with gain on sale of the bedroom as taxable gain. In other words, the house was divided into residential property and business property under the code. The code for business property did not and has not changed.... the bedroom office is still business property if that is its use, but the new §121 simply provides and exclusion of the business gain. But of course if there is a bedroom office business operating loss the loss is limited under §280 as the bedroom office is obviously within the home and therefore a "office in the home".

A separate structure is not physically within the home. It is not subject to §280 limitation if it is indeed properly classified from use by the taxpayer as business property under code §1231 and not considered used or a part of the home. In fact even if it is classified as within the home and/or subject to code §280, the code does not apply unless there is a need for expense allocation and or loss limitation.

How property, in this case, is classified under the code depends entirely upon the taxpayers intent, purpose when purchased, and use of the property. Its the old "facts and circumstances". It can be residential, commercial, or investment property depending upon the taxpayer statement as evidenced by the taxpayers use. The taxpayer has a right to treatment of all the tax laws that apply to his case and not just one that fits one tax auditor's personal opinion.

In this case the taxpayer has a choice as to what he decides the building is to be classified and used as and therefore what tax law is appropriate.

[Bees Knees]

You misunderstood my comment about clients with large acreage as residence. They do NOT farm, do not USE the land as a farm because they use the land as their residence and when they sell the 160 acre house and land the gain will be excluded under §121. If they are not farming why would they want the land sale taxed as a farm business?

I never said a guy living on 160 acres could not exclude the gain under section 121. Of course he can, IF the entire property is used as a residence and not for business.

Where did I say a 160 acres is too big to exclude under Section 121?

Code §280 indeed limits the loss of home property used for business but it does not limit §1231 business property losses. Note that before the §121 exclusion of gain the IRS position, evidenced by court cases, was that your bedroom office in the home was §1231 business property (and §1250) with gain on sale of the bedroom as taxable gain. In other words, the house was divided into residential property and business property under the code. The code for business property did not and has not changed.... the bedroom office is still business property if that is its use, but the new §121 simply provides and exclusion of the business gain. But of course if there is a bedroom office business operating loss the loss is limited under §280 as the bedroom office is obviously within the home and therefore a "office in the home".

Again, I never said you couldn’t use Section 121 to exclude the gain on an Office In Home, provided the portion used for business is a part of the dwelling unit used as your residence.

A separate structure is not physically within the home. It is not subject to §280 limitation if it is indeed properly classified from use by the taxpayer as business property under code §1231 and not considered used or a part of the home. In fact even if it is classified as within the home and/or subject to code §280, the code does not apply unless there is a need for expense allocation and or loss limitation.

How property, in this case, is classified under the code depends entirely upon the taxpayers intent, purpose when purchased, and use of the property. Its the old "facts and circumstances". It can be residential, commercial, or investment property depending upon the taxpayer statement as evidenced by the taxpayers use. The taxpayer has a right to treatment of all the tax laws that apply to his case and not just one that fits one tax auditor's personal opinion.

In this case the taxpayer has a choice as to what he decides the building is to be classified and used as and therefore what tax law is appropriate.

Here is where you are wrong. Code Section 280A(f)(1)(A) includes a separate structure located on the same property used as the taxpayer’s personal residence.

There is no choice in the matter. It is the law. It is what the code says. The only way you can argue that this separate structure does not fall under the loss limits of Section 280A is to claim the separate structure is not appurtenant to your dwelling unit used as your residence. One way to make that claim is when you have enough acreage to separate the business property from the personal use property, such as a 160 acre farm where the farm operation uses 159 acres and the house sits on its own 1 acre lot.

That is entirely different than a half acre lot with a house and pole barn out back. No way can you argue there is enough land to say the pole barn does not sit on the same plot of land as your house. It is subject to Section 280A. No taxpayer choice. The taxpayer cannot argue it is his business property under Section 1231 and therefore not subject to the loss limits of Section 280A. The office in home rules trump Section 1231, when the business property is a part of your dwelling unit used as your residence, or a separate structure appurtenant to the residence.

Sorry, but that is the law. It’s not the taxpayer’s choice. It’s the law.

[OldJack]

Where did I say a 160 acres is too big to exclude under Section 121?

I didn't say you did. Where you got that idea only you know. I was referring to the fact that it is the taxpayer and his "use of the property" that classifies 160 acres as business or residence... Not code §280.

Here is where you are wrong. Code Section 280A(f)(1)(A) includes a separate structure located on the same property used as the taxpayer’s personal residence.

Here is where you are wrong as you fail to recognize that code §280 is referring to personal use real estate used partial for business under the exclusive use test and etc. It is not applicable for business property (ie: the farm business, the gas station, the small grocery store, etc.) that might exist on property that happens to be owned by the same person that owns a house on the same deeded property.

There is no choice in the matter. It is the law. It is what the code says. The only way you can argue that this separate structure does not fall under the loss limits of Section 280A is to claim the separate structure is not appurtenant to your dwelling unit used as your residence.

What code section says there is "no choice" to anything. Appurtenance = American College Dictionary: "Law. a right, privilege, or improvement belonging to and passing with a principal property". If appurtenant, or belonging to, is what you are relying on then the 159 acre farm land would also fall under §280 as it is appurtenant to the mansion house. Your farmer clients are not going to like your decision to limit their farm operating loss under §280.

One way to make that claim is when you have enough acreage to separate the business property from the personal use property, such as a 160 acre farm where the farm operation uses 159 acres and the house sits on its own 1 acre lot.

Show us the code that defines the number of acres or size that makes the structure in or out of the §280 verses business property (farm). There is no code or no size except in your imagination. As there is no code that defines how much of any property is partially business (farm, gas station, etc) would you not think the taxpayer might be the one that defines the size by his choice and use?

That is entirely different than a half acre lot with a house and pole barn out back. No way can you argue there is enough land to say the pole barn does not sit on the same plot of land as your house. It is subject to Section 280A. No taxpayer choice. The taxpayer cannot argue it is his business property under Section 1231 and therefore not subject to the loss limits of Section 280A.

I have not taken a position or said that the pole barn is not on the same property as titled by deed. Land ownership is not the issue here as it is the building classification as to USE that is the issue. It is a simple issue... Is it a personal structure or a business structure. The taxpayer says the building is business property and you refuse to acknowledge that decision because it happens to be a small plot of land.

The office in home rules trump Section 1231, when the business property is a part of your dwelling unit used as your residence, or a separate structure appurtenant to the residence.

Sorry, but that is the law. It’s not the taxpayer’s choice. It’s the law.

I have no disagreement with §280 trumping a part of your "dwelling unit" but you are misinterpreting the definition and application of the word appurtenant.


Sorry but what you call "the law" is only your interpretation of the wrong section of law that is applicable to the case. It is like you think the code ends with §280.

You say the build is not §1231 yet that is exactly where you have authority for depreciation as §280 does not provide depreciation and define gain treatment.

A taxpayer does not need to be concerned with who owns the land in order to depreciate a business building under code §1231. Have you ever heard of leasing land for 99 years and building office buildings or an auto dealership.

You are really hung-up on that 1 acre yard and 159 acres farm land so bad that you are blind to the use of the property. To exaggerate how about 1 foot at the side of the property (yard) for a billboard (structure) business, would you call that under §280. Nonsense.

[Bees Knees]

Here is where you are wrong as you fail to recognize that code §280 is referring to personal use real estate used partial for business under the exclusive use test and etc. It is not applicable for business property (ie: the farm business, the gas station, the small grocery store, etc.) that might exist on property that happens to be owned by the same person that owns a house on the same deeded property.

Sorry, but the courts do not agree with you. A business located on the same property as your house can in fact fall under Section 280A.

I think the opinion in the following court case gives a good explanation of when a separate structure on the same land falls under the limitation of Section 280A. Note that the court does make reference to the size of the lot in determining whether or not it is a separate structure appurtenant to the taxpayers residence:


Scott v. Commissioner, 84 T.C. 683

P, a college professor, also owned and managed five rental properties
and operated a chemical analysis business. He used a separate structure
located in his backyard as an office to carry on his rental and chemical businesses.

Held:

1. The separate structure used as an office was "appurtenant to" P's
house and therefore constituted part of the dwelling unit for purposes of sec. 280A, I.R.C. 1954.



The petitioners argue that section 280A is inapplicable to the
deductions at issue because the office building did not constitute part of a "dwelling unit" within the meaning of such section. They contend that the office building is not appurtenant to their house and that it
constitutes a wholly independent office building not associated with their residence. We cannot agree.

The statute does not supply a definition of the term "appurtenant," but we must assume that Congress intended for the term to have its ordinary meaning. Black's Law Dictionary (5th ed. 1979) defines "appurtenant" as "Belonging to; accessory or incident to." Thus, one thing is appurtenant to another thing if it is directly related to the latter although not an essential part of it or not attached to it.

In this case, the petitioners' office building is on the same residential lot as the house; the office building is only 12 feet from the house; the office building is behind the house and in an area enclosed by a fence, and all of the expenses for the property, taxes, utilities, interest, and insurance, were included in common bills. Under these circumstances, we are convinced that there was a close relationship between the office building and the house so that it should be treated as appurtenant to the house and as a part of a dwelling unit subject to the rules of section 280A. The fact that the petitioner subsequently obtained a different address for the office building does not alter this conclusion.

[OldJack]

<< 1. The separate structure used as an office was "appurtenant to" P's
house and therefore constituted part of the dwelling unit for purposes of sec. 280A, I.R.C. 1954.>>

Once again Bees you completely miss the point of Code §280A. I would agree with this court case as the "use" is a "Office" structure shall we say in "lieu of space in the home" for the taxpayer. The structure in this case is not farm use, radio shop use, repair shop use, billboard, gas station, manufacturing building or in other words a separate business activity... it is in fact an office. Had this been a office building used for rental to others (skyscraper) it would not come under §280A as it is not an "office in the home" concept for the taxpayer. That is were you have your hang-up. There is a difference between an office-in-the-home structure and a §1231 business structure. Code §280A is very limited to its applicability and was written into the law mainly because of employees such as your case (college professors) wanting to claim expenses of his office in the home that just happens to be a separate structure. Code §280A was never intended to limit truley business activities such as the farming, etc. Thats the law.

As I have stated before and is true in this court case you look to the use of the property/structure for determination of which code applies. In this court case the use was for an "office in the home" that just happens to be a separate structure.

You are beating a dead horse with the wrong code as far as property used for other than an office of the taxpayer.

[jainen]

a single unit

>>look to the use of the property/structure<<

In the case Bees Knees cited, the court did NOT look to whether the usage was "office" or some other type of business activity. The building was appurtenant to the home because it was only a few feet away, enclosed in the same fencing, shared utilities, and was taxed as a single unit.

[OldJack]

Jainen,

<< 1. The separate structure "used as an office" was "appurtenant to" P's
house and therefore constituted part of the dwelling unit for purposes of sec. 280A, I.R.C. 1954.>>

I think the court's own word here clearly speak "used as an office" and that in fact was what the case was all about. Note that in their decision that point was shown as number #1. The size and location was only facts and circumstances.

[rosieea]

All this "arm wrestling" match seems to be saying is that whether 280A applies is a matter of facts & circumstances. The practitioner is going to have to make a judgement on the basis of its probability of being upheld under scrutiny. So, what else is new?

[Bees Knees]

All this "arm wrestling" match seems to be saying is that whether 280A applies is a matter of facts & circumstances. The practitioner is going to have to make a judgement on the basis of its probability of being upheld under scrutiny. So, what else is new?

I agree that facts and circumstances apply. The "arm wrestling" match is over what criteria is used in determining facts and circumstances. Old Jack seems to think how the property is used is the determining factor. I disagree. The code uses the term "appurtenant" in the context of the size and nature of the separate structure to the residence.

The court case I cited did not care about the nature of the business that was operating in the separate structure. It cared about the location of the separate structure.

A pole barn on a half acre lot that is the same lot as the taxpayer's residence will ALWAYS be subject to Section 280A if that pole barn is appurtenant to the house. It does not matter whether the business operating out of that pole barn is an office, or an auto repair shop, or a lawn care service. The determining factor is the relative size and importance the pole barn has to the residential unit.

A 160 acre farm, on the other hand, cannot be appurtenant to the farm house, since the size of the land itself is way beyond the needs of what a residential house needs to sit on.

Another way to look at it is when the business is sold. A 160 acre farm that is sold can easily be turned into a housing development, with the farm house still standing on its own little 1 acre lot. The farm house did not need all that land. Or the farm operation could continue after the sale even if the new farmers did not purchase the farm house for use as a residence. On the other hand, a guy operates a machine shop out of his pole barn sitting in the back yard of his half acre lot where his house also sits. He sells his business. The nature of his business is irrelevant, whether it is a machine shop, accounting practice, lawn care service, or auto repair service. The pole barn is appurtenant to the house, and cannot be separated from the land the house sits on. The new owner of the business is not likely to continue operating out of the same building. The new owner is going to take the business to a new location for obvious reasons. It is the size and nature of the land, not the nature of the business, that determines Section 280A treatment.

[OldJack]

Jainen, I just spent more than 2 hours searching for any 280A tax case that did not have anything to do with just an "office use" located in the home. The only thing other than an, "office use by the taxpayer", that I found was cases regarding bed and breakfast operations where in some cases the B&B came under 280A because of mixed use and some portion of the B&B did not because of exclusive use.

It would appear that if it is not an office expense type deduction (allocating personal expenses of the residence) the IRS doesn't take the case to court. I would further state that I have never personally had a case of 280A, or seen the IRS question (under 280A) a separate business structure and operation located on the same property as the taxpayer's residence.

If "appurtenant" is the determining factor why are there no court cases of farm operating deductions and losses limited under code §280A? Answer... because the farm operation, although conducted on land appurtenant to the residence, is not an "office-in-the-home" use limited by §280A. If the farmer "claims" an office-in-the-home deduction for farm business, that deduction is limited by 280A, but the farm operating profit/ loss deductions (barn depreciation, etc) are not subject to code 280A.

[Bees Knees]

If "appurtenant" is the determining factor why are there no court cases of farm operating deductions and losses limited under code §280A? Answer... because the farm operation, although conducted on land appurtenant to the residence, is not an "office-in-the-home" use limited by §280A. If the farmer "claims" an office-in-the-home deduction for farm business, that deduction is limited by 280A, but the farm operating profit/ loss deductions (barn depreciation, etc) are not subject to code 280A.

Wrong Wrong Wrong

A farm operation cannot possibly be appurtenant to the residence.

You need to look up the term appurtenant once more. The court case I cited defined the term as "Belonging to; accessory or incident to." A farm operation does not belong to the farm house. It is the farm house that is appurtenant to the farm operation.

[rosieea]

I agree that facts and circumstances apply. The "arm wrestling" match is over what criteria is used in determining facts and circumstances. Old Jack seems to think how the property is used is the determining factor. I disagree. The code uses the term "appurtenant" in the context of the size and nature of the separate structure to the residence.

The court case I cited did not care about the nature of the business that was operating in the separate structure. It cared about the location of the separate structure.

And I suspect that the court might have ruled that the office was not appertenant, if a few factors had been othwise arranged - e.g., separate metering of utilities, not fenced in behind the house, driveway & parking for the office structure, etc.

[OldJack]

The court case I cited did not care about the nature of the business that was operating in the separate structure. It cared about the location of the separate structure.

The location was a facts & circumstance, however, the case you sited was clearly for an "office-in-the-home deduction" determination and only because it was a separate structure did the location (appurtenant) and size have anything to do with it.

A pole barn on a half acre lot that is the same lot as the taxpayer's residence will ALWAYS be subject to Section 280A if that pole barn is appurtenant to the house. It does not matter whether the business operating out of that pole barn is an office, or an auto repair shop, or a lawn care service. The determining factor is the relative size and importance the pole barn has to the residential unit.

I strongly disagree. I have been unable to find any court case where the issue is not about an "office (used for a principal place business, etc)" or a business operated "within the physical residence" (ie: the B&B). Likewise, you have cited no court case to support such a conclusion. Code §280A is only applicable for a taxpayer trying to convert personal type expenses (home expenses) into business expenses.

A 160 acre farm, on the other hand, cannot be appurtenant to the farm house, since the size of the land itself is way beyond the needs of what a residential house needs to sit on.

The farm land and building are clearly "belonging (appurtenant) to" the residence. There is no definition within the term appurtenant that says size has anything to do with it. Granted, the court case you cited established all facts, one of which was the structure size.

Another way to look at it is when the business is sold. A 160 acre farm that is sold can easily be turned into a housing development, with the farm house still standing on its own little 1 acre lot. The farm house did not need all that land.

Irrelevant. Farm house "need" has nothing to do with Code §280A. Either the farm land is appurtenant or it is not. Truth is, the farm land is appurtenant to the residence, but that is not the issue as the farm operation is not being deducted as a "business office in the home" subject to §280A.

It is the size and nature of the land, not the nature of the business, that determines Section 280A treatment.

That is a ridiculous statement that has no basis in fact or law.

[Bees Knees]

I strongly disagree. I have been unable to find any court case where the issue is not about an "office (used for a principal place business, etc)" or a business operated "within the physical residence" (ie: the B&B). Likewise, you have cited no court case to support such a conclusion. Code §280A is only applicable for a taxpayer trying to convert personal type expenses (home expenses) into business expenses.

Section 280A also applies to the rental of vacation homes. Is a vacation home an “office in home?” No.

Section 280A also has application to a storage area where the taxpayer stores inventory or product samples.

Section 280A also comes into play for day care facilities.

You might also want to review Tobin v. Commissioner, T.C. Memo 1999-328

The taxpayer added an addition to her residence that was used as a conservatory. The court described it’s use:

“Many tropical plants were displayed in the conservatory. The conservatory also contained a patio garden and garden furniture for visitors. Petitioner used the conservatory primarily to display plants to show to the public. She also made it available to rent for weddings.”

The court ruled:

“Section 280A bars business deductions for a taxpayer's residence, unless an exception applies. Section 280A(c)(1)(A) allows a taxpayer to deduct home office expenses if the taxpayer uses the home office exclusively and regularly as the principal place of any trade or business. Petitioner points out that visitors to Broadmoor Gardens toured her entire residence and contends that section 280A does not apply to her residence because it was her principal place of business, and she used all of it for business purposes. We disagree. Section 280A applies to any dwelling unit that is used during the year as a residence, whether a taxpayer uses part or all of it for business. See sec. 280A(a). Petitioner lived in her residence in 1990 and 1991. Thus, the restrictions of section 280A apply to the addition, including the conservatory, because it was part of petitioner's residence.”

In the ruling, the court also noted Burkhart v. Commissioner, T.C. Memo. 1989-417, where a taxpayer “operated a photographic studio in the basement of his residence.”

Both of these cases were not determined on the usage as an “office in home,” but rather, were determined because a trade or business operated out of the taxpayer’s home.