home office improvement depreciation

[Maggie]

Client is self employed and has an office in his home. He needed to expand his workspace, so finished an office space in the basement. My understanding is that this cost is added to the basis of his home and depreciated over 39 years at the percentage of business square footage/total home square footage. Client wants to write it off quicker, and at 100% business. What are his options? Thanks!

[LawrenceGR]

Not many

Home office is 39 year depreciation.

[Maggie]

100% bus use?

Can he claim 100% of the depreciation or just a percentage based on sq. feet.

[taxxcpa]

Depreciation basis

The proper procedure would be first to take the total cost of the house plus improvements, including the cost of adding the office. This would be the gross basis in the house including the office. From this amount the value of the land should be deducted, then the depreciation allowable would be proportionate to sq ft of the office area divided by the total sq ft.

[Bees Knees]

disagree

Yes, depreciation of improvements made to an office in home are depreciated over 39 years.

However, specific improvements made to the area of the house that is 100% exclusive business use are depreciated in full as a separate asset.

Example: House basis minus land equals 250,000. Business use = 10%. $25,000 is depreciated over 39 years. Later, TP spends $2,000 in improvements directly connected with the office space. $2,000 is treated as a new asset separate from the house and depreciated over 39 years (not 10% of $2,000).

Improvements made to the office in home portion of the home are considered direct expenses, not indirect expenses. Only indirect expenses such as house utilities, insurance, mortgage interest, etc. are subject to the business percentage limit. Direct expenses specific to the business use area are always 100% business use.

[FEDUKE404]

More goodies to consider

Yes, as others have noted, he does have to deal with the 39 year depreciation issue (it's not a "residence" but rather a business property).

One other caveat: IIRC, there is something in the fine print about using the lesser of FMV on date of first office use versus original cost basis of home. The facts are not quite clear as to whether this could be called a separate structure, although it pretty much sounds like fixing up an unfinished basement or something similar.

And be sure to whisper "recapture" and "regularly/exclusively" in your client's ear!

FE

[oceanlovin'ea]

Might depend on what he did

It might depend on what he did. If he was adding walls or things like that, it might have to be considered improvement to house.
But if he was painting and putting down some flooring (not permanent) and buying furniture, etc, then I agree with Bees that it would be a direct cost and deductible in the year it is done.

Linda F