I don't see it this way. The property is owned by you the individual and not by the business (single family dwelling). There is only one house title, not one for the house and one for the house office. The house owner is also the sole proprietar of the business who claims the deduction according to IRS Code. However there is only one sale and one property sold (your house), not two. The essence of the deduction is that you are depreciating part of your home (like a business is able to depreciate its assets). The basis of the house is adjusted down for the depreciation taken. If your home were a normal asset you would then pay tax on gains based on the sales price - asset basis. However the special rules applicable to primary residences owned for 2 years or more eliminate the tax.
I heard it was that you had to have owned and lived in the residence for 2 of the last 5 years to qualify for no tax on sale of the house for up to 250k per person. Has this rule been changed or are u referring to something else?
The two out of five is to classify the property as a primary residence. So as of the date of sale, the property must have been occupied by you/your family as a primary residence in 2 of the preceding five years. The exclusion is 250K for singles and 500 K for couples. Tripack, unfortunately it does not matter how you see it, I am telling you what the code says for treatment of depreciation of an asset and its resale. You would be very well served to reference either the Ernest and Young or JK Lasser Tax guides for an explanation of this. You may also want to look at the IRC for sale of (I think it is section 1250 property) or the sale of depreciable assets. If you have 1000 Sq ft and 100 sq ft is office space. When you sell the house you get 100K, 90k is allocated to the house and is tax free for gains. The other 10 K would be allocated to the office, with any depreciation subtracted from the 10% of the cost of the house, it is now recaptured on 4797 as sale of a business asset. Same as if you sell a rental property, a farm tractor, or a company car. My further aside is that the home office deduction is a big red flag and often disputed deduction. So it really pays to do a little research on this topic before slapping it on a return.
179 is an often overlooked deduction that may help some of you save some bucks. Here's how it works, normally if you buy assets for your business, a computer, monitor, desk, chair, corvette, wet, bar, etc they must be depreciated over the asset life of the property. What Sec 179 lets you do is expense this all at once as a start-up cost of business. I think it is around 19k this year. Here is the thing though, and I don't want to preach, but I also don't want any of my cyberfriends being audited either. You have to qualify as a trader, and the only guidance is that a substantial portion of your income must come from trading. The example I read was a guy how used his office in his home to manage his investments, to the tune of 18 million. His entire deduction was disallowed because investing is not a business. Back Monday, heading for some sun and fun.
Here is a list of deductions for traders that I collected from different sources (e.g. GreenTraderTax) since I thought I would file M2M (decided against it, so I haven't used them). Hope it helps: · Margin interest · ISP, internet · Phone, cell phone · Datafeed · Software · Exchange fees · Computers · Equipment · Office supplies · Seminars, newsletters, education · Books · Magazines · Travel & Entertainment · Meals · Automobile expense · Furniture in office · Postage and Delivery · TV cable service · Banks service charges, Safe Dep. Box · Dues and Subscriptions · Licences and Permits, Professional Fees · Accounting & Tax Preparation · Legal fees · Insurance, disability insurance · Finance Charges · Mortgage · Real estate tax · Direct Expenses: painting, repair, build-ins, repair expense · Indirect Expenses: electric, gas, water, sewer, lawn care, cleaning, insurance
Right, so the 6 months out of 2 years that TriPack is referring to is clearly wrong? Or he is referring to something else?
There is another part of the home recapture that says if you lived in your home for 2 of the last 5 years as a home and used 100% of the home for personal, non business use during 2 of those years then your entire gain (up to the limits you previously specified) is deductible. See the section Excluding gain on the business or rental part of your home. located at: http://www.irs.gov/pub/irs-pdf/p523.pdf I agree that it may be a red flag for the IRS so you have to weigh audit risk against the possible gain by taking this (or any) deduction.
I saw the six months somewhere, but to further clarify what I found, you can use 730 days over a five year period as the test. So, the point is that it does not have to be CONTINUOUS residency, but it does have to be your PRIMARY residence to exclude the gain. So if you were active military or a gypsy you are set. And maybe somebody can tell me how, "come to our river house" sounds anything like "can you help us move a few shrubs, paint a porch, and assemble some shelves"??
Here is a link to the IRS for guidelines on what qualifies as a home office deduction.http://www.irs.gov/businesses/display/0,,i1=2&genericId=20171,00.html Tripack here is Pub 587 it is in PDF format for home office deductions. Page 11 should give you your answer. What I was thinking is that if you are prorating all of your expenses, mort interest, homeowners, % of electric, etc. you get some pretty nice write offs. Let me know if anyone is interested in MSA or Sec 179 information, I am researching this for a buddy so I may have some extra information. Hope everyone has a prosperous week.