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CareCPA

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According to this, in most cases, you can't use your 121 exclusion to avoid recapture:


"If you used the regular method to calculate your home office deduction, you must recapture, or pay back, all the depreciation you were entitled to take on your property (generally at a 25 percent rate), when you sell your house. This applies whether you actually expensed the depreciation or not. Depreciation deductions (which apply to only business – not personal – property) decrease your property’s basis, so that, when you sell your residence, it results in a greater gain. This gain, attributable to your depreciation deductions, is not excludable under IRC section 121, discussed below. On the other hand, if you used the simple method, there would be no depreciation deduction, no change in your house’s basis, and no recapture of depreciation on the sale of your residence."
Yes, this was what my memory was telling me (but my memory lies sometimes).
Given the earlier responses, I wasn't inclined to spend a lot of time double-checking my memories.
 

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biophase

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Can someone explain the difference between a home office deduction and home office depreciation?

Are we talking about the same thing here?
 

JScott

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Can someone explain the difference between a home office deduction and home office depreciation?

Are we talking about the same thing here?
Again, not a tax professional, but I'll take a shot...

Home Office deductions are for EXPENSES related to the portion of your personal residence that apply to the home office. For example, let's say your home office accounts for 10% of the total square footage of your personal residence. You can then claim 10% of the cost of a cleaning service, as 10% of that cost went towards keeping your home office clean. Likewise with utility costs, landscaping costs, etc.

Depreciation relates to the deterioration of capital items or real property. For example, if you buy a rental property, the IRS assumes the building part of the property (not the land) will deteriorate over some period of time, and they'll give a tax credit for that (depreciation). For residential, they assume the total deterioration period is 27.5 years, so you get 1/27.5 of the building value in depreciation each year for 27.5 years. For commercial property, it's 39 years.

So, for a home office, depreciation would refer to the tax credit on the deterioration of the portion of real property allocated to your home office. Again, if it's 10% of your personal residence, you'd get a depreciation write-off of 10% of the total building value over 39 years (which would be 1/39 of 10% of the building value every year).

For example, if you purchased a house for $500,000 and you assume the building value is $390,000 (land value $110,000), you'd get a depreciation write off for your home office of 10% of 1/39 of the $390,000 building value each year. Or $1000 in depreciation write off per year.

The EXPENSES deduction is not subject to recapture, so you wouldn't have to pay tax on the expense deductions you took when you sell the property. But, the depreciation IS subject to recapture. So, let's say you sell the property after 10 years of taking that depreciation (total depreciation write-off of $10,000), and let's say you sell the property for at least $10,000 over your cost basis -- you'll be subject to recapture tax on that $10,000 depreciation you had accumulated over the years. If you're in the 25% marginal tax bracket or above, you'd pay 25% of $10,000 ($2500) in depreciation recapture when you sell after 10 years.

IMPORTANT NOTE: If you take home office deductions, you are required to take home office depreciation as well according to the IRS. In other words, even if you don't take it, you'll still be subject to recapture tax when you sell.

IMPORTANT NOTE #2: There's another way to claim home office deduction -- for small offices up to 300 sf, you can claim $5/sf per year in home office deduction (assuming you have a space that qualifies for it). If you do it this method, you don't have to claim depreciation and you don't have to recapture it when you sell.

Lastly, a final reminder that I'm not a tax professional...so ignore everything I've said above... :)
 

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Again, not a tax professional, but I'll take a shot...

Home Office deductions are for EXPENSES related to the portion of your personal residence that apply to the home office. For example, let's say your home office accounts for 10% of the total square footage of your personal residence. You can then claim 10% of the cost of a cleaning service, as 10% of that cost went towards keeping your home office clean. Likewise with utility costs, landscaping costs, etc.

Depreciation relates to the deterioration of capital items or real property. For example, if you buy a rental property, the IRS assumes the building part of the property (not the land) will deteriorate over some period of time, and they'll give a tax credit for that (depreciation). For residential, they assume the total deterioration period is 27.5 years, so you get 1/27.5 of the building value in depreciation each year for 27.5 years. For commercial property, it's 39 years.

So, for a home office, depreciation would refer to the tax credit on the deterioration of the portion of real property allocated to your home office. Again, if it's 10% of your personal residence, you'd get a depreciation write-off of 10% of the total building value over 39 years (which would be 1/39 of 10% of the building value every year).

For example, if you purchased a house for $500,000 and you assume the building value is $390,000 (land value $110,000), you'd get a depreciation write off for your home office of 10% of 1/39 of the $390,000 building value each year. Or $1000 in depreciation write off per year.

The EXPENSES deduction is not subject to recapture, so you wouldn't have to pay tax on the expense deductions you took when you sell the property. But, the depreciation IS subject to recapture. So, let's say you sell the property after 10 years of taking that depreciation (total depreciation write-off of $10,000), and let's say you sell the property for at least $10,000 over your cost basis -- you'll be subject to recapture tax on that $10,000 depreciation you had accumulated over the years. If you're in the 25% marginal tax bracket or above, you'd pay 25% of $10,000 ($2500) in depreciation recapture when you sell after 10 years.

IMPORTANT NOTE: If you take home office deductions, you are required to take home office depreciation as well according to the IRS. In other words, even if you don't take it, you'll still be subject to recapture tax when you sell.

IMPORTANT NOTE #2: There's another way to claim home office deduction -- for small offices up to 300 sf, you can claim $5/sf per year in home office deduction (assuming you have a space that qualifies for it). If you do it this method, you don't have to claim depreciation and you don't have to recapture it when you sell.

Lastly, a final reminder that I'm not a tax professional...so ignore everything I've said above... :)
Yea, the short version is:
Home office depreciation is a portion of your home office deduction. If you use actual expenses, depreciation is one of several expenses (along with utilities, allocated taxes and insurance, etc).
If you use the Simplified method, no depreciation needs to be calculated or recaptured, as @JScott noted above.
 

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Yea, the short version is:
Home office depreciation is a portion of your home office deduction. If you use actual expenses, depreciation is one of several expenses (along with utilities, allocated taxes and insurance, etc).
If you use the Simplified method, no depreciation needs to be calculated or recaptured, as @JScott noted above.
So...

If you rent the house for $3000/mo and use 10% as office you can use $300/mo as a home office expense.

If you purchase the home, you can depreciate 1/39 a year but not use it as an expense deduction.

Trying to figure out if it’s better to rent the home or buy in this case assuming same utilities and other expenses etc... is being expensed in both scenarios.
 

JScott

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If you rent the house for $3000/mo and use 10% as office you can use $300/mo as a home office expense.
Yup.

If you purchase the home, you can depreciate 1/39 a year but not use it as an expense deduction.
Depreciation is pretty much the same as any other expense deduction, but it needs to be recaptured. And yes, 1/39 per year OF THE PERCENTAGE USED BY THE OFFICE.

Trying to figure out if it’s better to rent the home or buy in this case assuming same utilities and other expenses etc... is being expensed in both scenarios.
I certainly wouldn't make a buy/rent decision solely on home office deductions. The amount you'll save just isn't enough to make a major factor (unless your situation is much different than most).

Also note that there are very specific IRS rules around what constitutes a home office. My tax adviser suggests that if you claim more than 15% of the total square footage, you're setting yourself up for an audit risk.
 

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Yup.



Depreciation is pretty much the same as any other expense deduction, but it needs to be recaptured. And yes, 1/39 per year OF THE PERCENTAGE USED BY THE OFFICE.



I certainly wouldn't make a buy/rent decision solely on home office deductions. The amount you'll save just isn't enough to make a major factor (unless your situation is much different than most).

Also note that there are very specific IRS rules around what constitutes a home office. My tax adviser suggests that if you claim more than 15% of the total square footage, you're setting yourself up for an audit risk.
This is great, I don't have to answer tax questions anymore :)

Just to reiterate, I would be surprised if this one specific deduction swung the scales for you on whether to rent or buy.
 
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You are misunderstanding how depreciation (and recapture) works here. In your scenario above, the vehicle has been fully depreciated, so the cost basis (for taxes) is $0. If you sell that vehicle for more than $0, you must recapture depreciation up to the sale price -- and you will pay tax on that delta between the cost basis the gain.

This is absolutely no different than your Situation 2 below.



You are wrong about this being different than Scenario 1 above. They are exactly the same.



Sounds like you're not studying it AND you're not getting what you're paying for from your accountant.

It's your responsibility to either understand this or do some due diligence to ensure that you hire someone who does. Just because you don't want to put in the work doesn't absolve you from the ramifications of not understanding it. I don't like to study tax rules either, but I do it so that I have control over my financial life.



It *is* a write-off, and it has several benefits:

1. You often pay recapture at a lower rate than the tax benefit it provides, thereby offering you a permanent savings;

2. You have access to the tax benefits today and don't have to repay until tomorrow. Given time value of money, this provides you free money;

3. Depreciation *only* needs to be recaptured if the the sale price is higher than the cost basis, which is reduced by the depreciation.

All that said, if you really can't handle paying depreciation recapture, all you have to do is take the tax savings you get each year from depreciation, stick it in a savings account, and then use it to pay recapture later. Given the benefits above, you'll likely find that the money in the savings account will cover the recapture *plus* leave left-over that is pure profit.

The IRS is giving you a credit for the deterioration of capital items -- all they ask for in return is that you pay tax if the credit they've given you exceeds the actual deterioration of that item.



Nope. Again, the two Scenarios are exactly the same. The only difference is that your vehicle will tend to go down in value while your home will tend to go up in value. But, from a tax perspective and from a depreciation recapture perspective, they are EXACTLY THE SAME.
First of all, THANK YOU for supplying a detailed explanation, which is correct. Because I have two of your books, I will emphasize here, for everyone to see, what a great writer you are.

But.

To the point; If I paid $10,000 a year rent for outside office space, that is a legitimate business expense. That money is long gone, of course, and it is written off 100% as an expense.

If, on the other hand, I depreciate the same expense using the space in my home for the same business, it is not an expense even though I can write it off the same as if it were a rented office outside my home. You did a great job of explaining the benefits and the reasons. However, there are important factors to be aware of.

Sure, there may be slight - and I emphasize slight - advantages. Big damn deal. You are correct when you suggest I set aside the taxable savings into a savings account each year. Well, if I'm setting aside that money, then I don't have the money to use for business purposes - so why play this silly game? To come out ahead a pittance at the end? I'll save 10% on the taxes? Big damn deal. I save 10% on something every week - all I have to do is shop the sales at the grocery stores. On major holidays, I can save 10% on mattresses, furniture, outdoor grills, and garage door openers, if I shop the sales carefully. If I save 10% enough of the time, could I become a millionaire? That's how ridiculous this system is. Where we differ is I call an expense an expense, plain and simple. What you call recaptured depreciation, I call a loan. If it will be paid back, it's a damn loan - minus the details you cited, which I won't go into again for the sake of brevity.

But the point is - now we know. I didn't know this the first time around and therefore was socked with a huge tax bill when I sold my house. The end result was "well, we gave you the legitimate deduction for the expense of your home, but now we want it all back." This point is not hard to grasp, so let's not make it needlessly complicated. What the government is saying is that depreciation is not a deduction, as most people think of a deduction. A deduction is a write off of some sort that doesn't come back and demand to be repaid. And that is the whole point I was making, so others that don't know how the game is played can now be informed.

And while we're on the subject of playing with word meanings, another irritating thing the government does is defend itself on how much it taxes. This comes into play when you pay a fee. They say, oh that's a fee, not a tax. Technically, that's right, so we should not complain then. In the real world, if I have to write a check, it's a damn tax. But it's not a tax - it's a fee - like the yearly license fee for your car. You've already been taxed on it, so they can't tax you again, but they can fee you every year. That's one of many examples. My point is that words can be tricky. Just as a fee is not a tax - depreciation is not a deduction - even though it technically is, as you've explained. They're doing the same thing now with Social Security - trying to call it an "entitlement." That means it's not yours anymore - it's theirs. Yes, it's your money, but it's not your money anymore. Word games. When you see the whole picture, you see how wrong - even evil perhaps - it really is.

You're one of the smartest people I know @JScott, so I know you understand what I'm saying. Let's not mince words and meanings - let's look at the end results. I have a full understanding of how we are being cheated at every turn, and changing the wording doesn't change what's happening in the end.

That's very similar to how your home is taxed. It is valued, but that's not the amount it's taxed on. They apply a formula to come up with the "taxable amount" which is a lot less than the actual market value. For example, your home might be worth $418,400 through careful analysis. BUT the government, through the goodness of their tiny hearts, is only going to tax you on $30,125. Look how much you're saving! We're all saving so much, we should be millionaires! Put enough spin on it till it sounds good!

24971

Now that we know how the game is played, hopefully, we can plan accordingly. And hopefully, nobody will be hit with reclaiming ten years of depreciation, as I was. Even though a home office depreciation is a deduction, it is not a deduction in the sense of a deduction being an expense. There.
 
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You are just upset that the law doesn't provide you a way of screwing over the company that extended you credit and that you refused to repay. Sorry dude, but if you want sympathy that the state won't help you to not repay your debts, you're not going to get it here.

Take some responsibility for your decisions and stop blaming other people for your mistakes.
I will just add two situations, and let others be the judge. You have already judged me, so I am well aware of your opinion. I don't agree with it, which is why I'm adding this information.

1) My wife and I were hit by an uninsured driver, which resulted in the car being totaled. We could have been killed, so we were very fortunate. There was absolutely nothing we could have done to prevent this accident.

2) My business was wiped out in less than a week, as were all my customers, due to the recession. There was absolutely nothing I could have done to foresee this or prevent it from happening.

I do take responsibility for my actions and decisions. In the first case, our insurance paid for the totaled car. In the second case, I was left standing, like a bomb had gone off and destroyed everything in sight. I was forced into survival mode at that point and found myself instantly poor. Like pudding mix - add water and it's done instantly. As in instant Polaroid photos. As is wasn't here yesterday, but sure is right now.

That has taken me a very long time to recover because of other issues that unexpectedly came up. Life happens.

I guess I wouldn't mind manning up if there was some sort of "bailout" like all the "too big to fail" banks received that caused this shit storm. But there's not, unfortunately, so my survival mode required that I pay for survival first, and everything else second.

There was no advantage for me in this. I did not try to "screw anyone" - and in fact, if anyone was screwed it was me, as I have no credit, but I do have multiple judgments. So I didn't do this for personal gain of any sort. Years later I am only now starting to rebuild, which, as a side note, this Forum has been invaluable beyond words.

My mistake was being in the wrong place at the wrong time. Just like all the poor people starving in the world today because they were born in the wrong place. Try to remember that as you enjoy the circumstances of your life that DIDN'T stab you in the back and leave you for dead on the side of the road, or starving.
 

JScott

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...so my survival mode required that I pay for survival first, and everything else second.
Nothing wrong with that at all. You have every right to focus on your survival first...

But, here's the thing... If you really feel that's okay, you shouldn't get angry when other people YOU'VE HURT try to take care of themselves first as well. Specifically, the company that lent you money is attempting to take care of themselves first by trying to collect on the debt you incurred.

For some convoluted reason, you don't think they should have a right to do that. Why not? Why shouldn't they be allowed to take care of themselves by coming after the money they are rightfully owed? Why should they have to put YOUR needs ahead of their own?

The problem here is that you're trying to take care of yourself first and you expect others to take care of you first as well. That's entitlement mentality, and it's not going to fly with many of us here...
 

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What you call recaptured depreciation, I call a loan. If it will be paid back, it's a damn loan - minus the details you cited, which I won't go into again for the sake of brevity.
Cool, call it a loan. But, it's not JUST a loan. It's an interest free loan that actually pays you take it.

If I offered you a loan right now and told you that not only would you not have to pay interest on it, but that you would have to pay back less than what you borrowed, would you take the loan?

The IRS is offering you FREE MONEY, and you're complaining that it's not enough money to be worth it. How ridiculous is that???

Okay, I think I can make this more clear... Here's an analogy for you...

Let's say that BEFORE a big storm, your insurance company handed you $10,000 to replace the roof should it get damaged in the storm. The storm comes, the roof gets damaged, and you have your $10,000 to repair it. Great! But, what if the storm comes and doesn't damage the roof? Do you think you should be entitled to keep that $10,000? Would you complain that the insurance company gave you a $10,000 loan and is now expecting you repay it despite the fact that you didn't need it to compensate you for any loss?

This is how depreciation works. You're being compensated -- in advance -- for a loss. If you don't actually have that loss, they want their money back. That's not unreasonable.

As to your point about renting being a deduction that doesn't have to be paid back compared to depreciation which MIGHT have to be paid back is a completely separate issue. When you rent, you get no long term benefit from the property. You're literally trading money for space, end of story. This is an expense to the company that the company can never recoup, so the IRS gives you a deduction against income.

So, using the analogy above, the renting situation is the same as being 100% certain that the storm will destroy your roof. The insurance company says, "There's no way you're not going to take a loss from this storm, so we'll agree upfront that you don't have to give us the $10,000 back."

That's what the IRS is doing. They know that by renting, there is 100% guarantee of no upside. So, they tell you upfront that you'll never have to repay the deduction.

Does that clarify?
 

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When we talk about systems in business we are referring to systematic actions, step by step procedures that are followed consistently to produce optimal results.

They are basically checklists for employees, you need them otherwise they can steal from you or make silly mistakes that end up costing you money.. They are necessary if you want to work less in the business and eventually sell it or just retire.
 
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Cool, call it a loan. But, it's not JUST a loan. It's an interest free loan that actually pays you take it.

If I offered you a loan right now and told you that not only would you not have to pay interest on it, but that you would have to pay back less than what you borrowed, would you take the loan?

The IRS is offering you FREE MONEY, and you're complaining that it's not enough money to be worth it. How ridiculous is that???

Okay, I think I can make this more clear... Here's an analogy for you...

Let's say that BEFORE a big storm, your insurance company handed you $10,000 to replace the roof should it get damaged in the storm. The storm comes, the roof gets damaged, and you have your $10,000 to repair it. Great! But, what if the storm comes and doesn't damage the roof? Do you think you should be entitled to keep that $10,000? Would you complain that the insurance company gave you a $10,000 loan and is now expecting you repay it despite the fact that you didn't need it to compensate you for any loss?


This is how depreciation works. You're being compensated -- in advance -- for a loss. If you don't actually have that loss, they want their money back. That's not unreasonable.

As to your point about renting being a deduction that doesn't have to be paid back compared to depreciation which MIGHT have to be paid back is a completely separate issue. When you rent, you get no long term benefit from the property. You're literally trading money for space, end of story. This is an expense to the company that the company can never recoup, so the IRS gives you a deduction against income.

So, using the analogy above, the renting situation is the same as being 100% certain that the storm will destroy your roof. The insurance company says, "There's no way you're not going to take a loss from this storm, so we'll agree upfront that you don't have to give us the $10,000 back."

That's what the IRS is doing. They know that by renting, there is 100% guarantee of no upside. So, they tell you upfront that you'll never have to repay the deduction.

Does that clarify?
That is a very good explanation. Thanks ~
 

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