Need Help Understanding Depreciation

[kyounge1956]

So, I filed for a 6-month extension in April because all my financial records were still in storage. The six months are up on Oct 15th and I've been working on completing my 2012 tax return. This afternoon, I thought I had it all done when I suddenly remembered I sold my house last year. I figured, since the sale price was less than $250K and I met all the other requirements, the whole amount was excludable. However, I don't have all the numbers I need to fill out the forms, so I called the IRS helpline, explained the situation, and asked how to complete the return, on the assumption that even if I had gotten the house for free, I would have no taxable gain because the selling price was under the excludable amount. Well, the guy on the phone asked me a bunch of questions and everything was going fine when he asked whether I had ever used any part of the house for business. For several years I had used my spare bedroom to store inventory for my Amway distributorship, so I answered "yes". That makes a big problem, because if any depreciation of the part of the house used for business had been allowed, that amount can't be excluded from the gain, even if I didn't in fact take any depreciation. I remember filing Schedule C's at least once or twice on the distributorship, but I've been inactive since 2004 and since I only keep my returns for 7 years, I have none of those records to refer to.

Can somebody explain to me simply the circumstances under which no depreciation is allowable? The guy on the phone talked so fast I hadn't a hope of making notes. I've tried reading the forms and instructions but it's all gibberish to me. The only thing I've understood so far is that if there was no allowable depreciation, I can exclude the whole proceeds of the sale of my house, and finish my return. If I could have taken depreciation, I don't know what to do next. Guess that's what I get for trying to be honest.

[pb4uski]

I think what he is saying is that if you were entitled to claim depreciation then that depreciation would be recaptured - see the Example 1 below. The question then becomes whether you were entitled to take a depreciation deduction in those years. To be honest, I wouldn't fret about it too much - I suspect at worst you would be liable for 15% capital gains tax on the amount of the gain (depreciation recaptured) - how much could that be?

Quote:

Property Used Partly for Business or Rental If you use property partly as a home and partly for business or to produce rental income, the treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Part of Home Used for Business or Rental If the part of your property used for business or to produce rental income is within your home, such as a room used as a home office for a business, you do not need to allocate gain on the sale of the property between the business part of the property and the part used as a home. In addition, you do not need to report the sale of the business or rental part on Form 4797. This is true whether or not you were entitled to claim any depreciation. However, you cannot exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997. See Depreciation after May 6, 1997, earlier. Example 1. Ray sold his main home in 2012 at a $30,000 gain. He has no gains or losses from the sale of property other than the gain from the sale of his home. He meets the ownership and use tests to exclude the gain from his income. However, he used part of the home as a business office in 2011 and claimed $500 depreciation. Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale between the business part of the property and the part used as a home. In addition, he does not have to report any part of the gain on Form 4797. Because Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. He reports his gain, exclusion, and the taxable gain of $500 on Form 8949 and Schedule D (Form 1040). Example 2. The facts are the same as in Example 1 except that Ray was not entitled to claim depreciation for the business use of his home. Since Ray did not claim any depreciation, he can exclude the entire $30,000 gain.

[kaneohe]

You might want to ask your question at fairmark.com........in either the capital gain or other topics subforums.

Did you take home office deductions for that home biz? If you did, I suspect the IRS guy might be right. If you didn't, ??

[GrayHare]

Here's the key: "... except that Ray was not entitled to claim depreciation for the business use of his home."

So, if that part of the house used for business was not *exclusively* used for business, for tax purposes it was not depreciable, and thus there is no recapture.

Details are at http://www.bankrate.com/finance/mone...x-costs-2.aspx

[kyounge1956]

Quote:

Originally Posted by GrayHare Here's the key: "... except that Ray was not entitled to claim depreciation for the business use of his home." So, if that part of the house used for business was not *exclusively* used for business, for tax purposes it was not depreciable, and thus there is no recapture. Details are at The hidden tax costs of a home office

That was the part that I couldn't figure out, was I or wasn't I entitled to depreciate? However, the spare room was *not* used exclusively for business. So now I can honestly say that, to the best of my knowledge, there was no allowable depreciation, and the whole proceeds of sale can be excluded from CGT. Whew!What a relief!

[kaneohe]

found this last night which surprised me..........so just to muddy the waters a bit

2. For certain storage use, ..................., you are required to use the property regularly but not exclusively.

from Work From Home? Consider the Home Office Deduction

[kyounge1956]

Quote:

Originally Posted by kaneohe found this last night which surprised me..........so just to muddy the waters a bit 2. For certain storage use, ..................., you are required to use the property regularly but not exclusively. from Work From Home? Consider the Home Office Deduction

I read the article and the paragraphs about use of part of a residence to store inventory in the IRS publication. It appears to me these are rules about whether there was an allowable deduction for business use, not allowable depreciation of the house itself, which is what I was worried about.

[kaneohe]

Quote:

Originally Posted by kyounge1956 I read the article and the paragraphs about use of part of a residence to store inventory in the IRS publication. It appears to me these are rules about whether there was an allowable deduction for business use, not allowable depreciation of the house itself, which is what I was worried about.

As I mentioned earlier, you'll probably get a better answer at fairmark.com.
Here's part of the article...........the link doesn't work for me but if you google "home office deduction" , this is one of the first entries.

************************************************** **********
Work From Home? Consider the Home Office Deduction
Tax Tip 2011-53, March 16, 2011

Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction. Here are six things the IRS wants you to know about the Home Office deduction
1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:
.................................................. .........

2. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.

************************************************** ************
You are correct that it talks about the home office deduction. The thing
that is of interest is that although the "exclusively and regularly" clause
is often talked about , the "regularly but not exclusively" for storage use
is not. That seemed to be relevant here.....see 9/26 2:29AM

The other distinction that you seem to be making is between home office deduction and depreciation. As the IRS guy and pb4uski seemed to be saying, if you took a home deduction and were entitled to take depreciation, then you might be subject to recapture of that depreciation whether you took it or not.

Again, I would suggest that you might run it by fairmark.com forum.

[kyounge1956]

Quote:

Originally Posted by kaneohe (snip) The other distinction that you seem to be making is between home office deduction and depreciation. As the IRS guy and pb4uski seemed to be saying, if you took a home deduction and were entitled to take depreciation, then you might be subject to recapture of that depreciation whether you took it or not.

Yes, that is how I understand it too. If there was any allowable depreciation, I could not exclude the allowable amount from my capital gains, whether in fact I depreciated my house or not. What I need is the answer to this question: under what circumstances would there be neither allowed nor allowable depreciation? GrayHare quotes two examples from the IRS publication, one in which the hypothetical taxpayer "Ray" was entitled to take depreciation and one in which he wasn't. But there is no explanation in the publication of why, in the second example, he wasn't entitled to depreciate the part of his home which he used for business.

Quote:

Again, I would suggest that you might run it by fairmark.com forum.

I tried a quick look at fairmark and found it as hard to understand as he IRS guy or the publications he referred me to. But I will look at it again later. I really don't want to join another forum but I guess I will if I have to in order to get the answer to this question.

[kaneohe]

Quote:

Originally Posted by kyounge1956 . What I need is the answer to this question: under what circumstances would there be neither allowed nor allowable depreciation? GrayHare quotes two examples from the IRS publication, one in which the hypothetical taxpayer "Ray" was entitled to take depreciation and one in which he wasn't. But there is no explanation in the publication of why, in the second example, he wasn't entitled to depreciate the part of his home which he used for business.

Yes, I agree that is the relevant question. I'm guessing that the depreciation goes along w/ the home office deduction (mortgage/utilities/other house expenses) so you wouldn't be able to take that deduction if you didn't meet the use requirements (whichever applied to your situation).

After you got to fairmark.com, click on message boards to get this
http://fairmark.com/forum/index.php
After to register, select the appropriate subforum.....either capital gains or Other Tax Questions to submit your question.