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tax question re: home office
Old 07-29-2009, 06:24 PM   #1
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tax question re: home office

I recently started working from home as an independent contractor. I know that entitles me to a tax deduction for my "home office" space, but I'm not sure it's worth the bother of figuring the depreciation when we'll have to subtract it out anyway when we sell the house. (And yes, I know it has to be dedicated work space, etc., to claim a deduction).

We do plan to keep the house long-term, and have already used up about 200K of our exemption, even with the housing crash. Plus we rented it for a few years, which was some additional depreciation.

I took the rental depreciation because from what I could tell, the IRS assumes you took it when you sell, whether you did or not. Do they do that with the home office too?

Our tax bracket now is pretty low (15%), although that may change depending on how much work I get. I'm thinking it might just be to our advantage to preserve the home sale deduction for later, when rates might be higher.

Any thoughts on this?
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Old 07-29-2009, 06:36 PM   #2
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When I was working as an independent contractor last year I decided not to take the deduction, as to me the minimal amount I could claim would have caused more headaches than it was worth. It's one of those things you need to research or speak to an accountant about as it's not simply a case of taking a deduction - it's all based on square footage etc.
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Old 07-29-2009, 07:16 PM   #3
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I use turbo tax and it's very easy to calculate the deduction. I just punch in the dimensions of the office and it calculates everything for you. My home office deduction was $2,135 last year. It's a nice deduction since my contract work is only part time. My office is 10% of the sq footage of my house. The biggest thing is the mortgage rate interest...I also deduct the real estate taxes, insurance, utilities, repairs and maintenance, and other expenses.
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Old 07-29-2009, 07:31 PM   #4
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I use turbo tax and it's very easy to calculate the deduction. I just punch in the dimensions of the office and it calculates everything for you. I think it's a decent size deduction -- I can look up the actual numbers if you would like.
Thanks, I'll be using turbo tax as well. But the deduction depends on the expenses associated with the house, right? Our property taxes are relatively low, as is the basis for the house since it's small (1000sqft). Over a number of years, I'm sure it would be worth the effort, but my question is more along the lines of: is it worth the effort now, or should I just ignore it and preserve as much of the standard 500K exemption as possible for when we eventually sell the house?

I guess the thing that made me wonder about this is that we recently sold another house we'd been living in, and on one of the forms there was a question along the lines of, "Was a business ever operated out of the home?" If I say yes to that, will the IRS assume I took the depreciation? I suppose it can't be that simple, since they wouldn't know the percentage used as an office.
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Old 07-29-2009, 08:11 PM   #5
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Quote:
Originally Posted by WM View Post
Thanks, I'll be using turbo tax as well. But the deduction depends on the expenses associated with the house, right? Our property taxes are relatively low, as is the basis for the house since it's small (1000sqft). Over a number of years, I'm sure it would be worth the effort, but my question is more along the lines of: is it worth the effort now, or should I just ignore it and preserve as much of the standard 500K exemption as possible for when we eventually sell the house?

I guess the thing that made me wonder about this is that we recently sold another house we'd been living in, and on one of the forms there was a question along the lines of, "Was a business ever operated out of the home?" If I say yes to that, will the IRS assume I took the depreciation? I suppose it can't be that simple, since they wouldn't know the percentage used as an office.
I'm not sure about the most of those questions but this is how I think the deduction works...say I paid $10,000 for my mortgage interest, utils, insurance and taxes. If I have a 1,000 sq foot house with a 200 sq foot office I could deduct 20% (200 sq ft / 1,000 sq ft) of my housing expenses. Obviously the bigger the size of the office the better. I'm not 100% sure if this is correct so you might want to double check.
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Old 07-29-2009, 09:07 PM   #6
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Quote:
Originally Posted by WM View Post
I recently started working from home as an independent contractor. I know that entitles me to a tax deduction for my "home office" space, but I'm not sure it's worth the bother of figuring the depreciation when we'll have to subtract it out anyway when we sell the house. (And yes, I know it has to be dedicated work space, etc., to claim a deduction).
We do plan to keep the house long-term, and have already used up about 200K of our exemption, even with the housing crash. Plus we rented it for a few years, which was some additional depreciation.
I took the rental depreciation because from what I could tell, the IRS assumes you took it when you sell, whether you did or not. Do they do that with the home office too?
If you use the home-office deduction then the cost-basis tracking can get pretty detailed. Not impossible but certainly less than fun. We're still tracking a cap-gains rollover from the sale of a home in 1989, and by the time we close it out it may be older than the IRS auditors.

I don't know if the IRS expects you to take the home-office deduction, but I do know that the home-office deduction is an audit flag. Admittedly this may raise your audit "chances" from 0.01% to 0.05%, but if you have any other flags then this may put you over the top.

If you're reluctant to take the deduction then maybe the answer to your question is in your description of the space. If you don't make it a dedicated work space then you "can't" take the deduction, and the IRS has to agree with your assessment of the situation.
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