Eric Posted March 8, 2016 Report Share Posted March 8, 2016 Alright, this is the last newbie tax question from me, I know you folks are busy. This year, we spent a small fortune doing work to our 150-year-old home. I have a home office, it meets all of the requirements, and it's 13% of our house's square footage. It seems to me that the bulk of the money we spent on the house isn't going to help out our tax situation, since things like a new roof, siding, insulation, plumbing, electrical, etc are considered home improvements, and not repairs. And as I understand it, "improvements" add to the basis, which is basically worthless, while "repairs" are expenses. What if we replaced an old water softener? What if the brick chimney was rebuilt from the roof up, and then a stainless liner was added? What if the electrical service wasn't to code, and we moved it to the front of the house from the back? What if the stairs were all wonky and we shimmed them all to make them level and consistent in height? In some rooms we patched and painted existing drywall. Sounds like a repair. In other rooms we gutted down to the studs and put up new drywall. Sounds like an improvement. Are any of these repairs, or are they all improvements? Is it just me and my non-tax-person-noodle-brain, or is this whole thing incredibly wishy-washy and open to interpretation? That's how it feels, and I don't like it. Numbers are supposed to be easy, not nebulous and fluffy. It's a perversion of mathematics. Screw this, I'm doing shots. 2 Quote Link to comment Share on other sites More sharing options...
BHoffman Posted March 8, 2016 Report Share Posted March 8, 2016 I'll drink to that! Seriously, unless the amounts eligible for expensing were able to be directly allocated I probably wouldn't try to list them for the home office. Very hard to defend if questioned. BTW: I'm wondering how others are feeling about the Home Office Safe Harbor election? Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted March 8, 2016 Report Share Posted March 8, 2016 Eric you mention a lot of repairs. Only those repair expenses directly related to the space used as your home office are deductible. These would be your direct expenses. The remaining repair are not for business use and cannot be deducted. The indirect expenses such as the mortgage interest, utilities, insurance; etc are indirect expenses and deductible by the percentage of the home used. Hope this helps. As you stated, the expenses added to basis is useless unless of course the IRS changes the 121 exclusion rules. 2 Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted March 8, 2016 Report Share Posted March 8, 2016 8 minutes ago, BHoffman said: I'll drink to that! Seriously, unless the amounts eligible for expensing were able to be directly allocated I probably wouldn't try to list them for the home office. Very hard to defend if questioned. BTW: I'm wondering how others are feeling about the Home Office Safe Harbor election? Where are you finding information on the home office safe harbor election? I was just looking at Pub 587 for 2015 returns and found no mention of this. Resources please. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 8, 2016 Report Share Posted March 8, 2016 Agree with Terry's first post; I was typing at the same time. If the improvements are made after the home office has already been in service, only those that affect the business portion of the home are added as depreciable assets and depreciated over 39 year life. Probably the only item you listed would be the electric service upgrade because it benefits the office as well as the rest of the home. The chimney might be a possibility if it is used by the furnace, but not if used solely by a fireplace that isn't used as heat for the office. 1 Quote Link to comment Share on other sites More sharing options...
grmy2h Posted March 8, 2016 Report Share Posted March 8, 2016 https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Simplified-Option-for-Home-Office-Deduction Quote Link to comment Share on other sites More sharing options...
Eric Posted March 8, 2016 Author Report Share Posted March 8, 2016 3 minutes ago, Terry D said: Eric you mention a lot of repairs. Only those repair expenses directly related to the space used as your home office are deductible. These would be your direct expenses. The remaining repair are not for business use and cannot be deducted. The indirect expenses such as the mortgage interest, utilities, insurance; etc are indirect expenses and deductible by the percentage of the home used. Hope this helps. As you stated, the expenses added to basis is useless unless of course the IRS changes the 121 exclusion rules. General repairs are also listed as indirect expenses and Deductible based on the percentage of your home used for business. 10 minutes ago, BHoffman said: I'll drink to that! Seriously, unless the amounts eligible for expensing were able to be directly allocated I probably wouldn't try to list them for the home office. Very hard to defend if questioned. BTW: I'm wondering how others are feeling about the Home Office Safe Harbor election? I have receipts and totals for specific jobs, like the chimney, and materials and labor broken down by project. 2 Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted March 8, 2016 Report Share Posted March 8, 2016 Eric, I would be careful here. Pub 587 is pretty straight forward on the repair expenses for the room used for business are direct expenses. I do agree with Judy that some of those she mentions you may be able to use. Again the chimney maybe because the furnace is used to heat the entire house. Same with the electrical. But... repairs to the other rooms don't qualify. Quote Link to comment Share on other sites More sharing options...
Eric Posted March 8, 2016 Author Report Share Posted March 8, 2016 9 minutes ago, jklcpa said: Agree with Terry's first post; I was typing at the same time. If the improvements are made after the home office has already been in service, only those that affect the business portion of the home are added as depreciable assets and depreciated over 39 year life. Probably the only item you listed would be the electric service upgrade because it benefits the office as well as the rest of the home. The chimney might be a possibility if it is used by the furnace, but not if used solely by a fireplace that isn't used as heat for the office. That makes sense. The chimney is for the furnace. But the confusing part for me is still determining what is a whole-house repair (expense), and what is a whole house improvement (depreciable). Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 8, 2016 Report Share Posted March 8, 2016 3 minutes ago, Eric said: General repairs are also listed as indirect expenses and Deductible based on the percentage of your home used for business. Yes, to the above. Just don't add the improvements as additional depreciable items unless they benefit the office in some way. 2 Quote Link to comment Share on other sites More sharing options...
Eric Posted March 8, 2016 Author Report Share Posted March 8, 2016 10 minutes ago, Terry D said: Eric, I would be careful here. Pub 587 is pretty straight forward on the repair expenses for the room used for business are direct expenses. I do agree with Judy that some of those she mentions you may be able to use. Again the chimney maybe because the furnace is used to heat the entire house. Same with the electrical. But... repairs to the other rooms don't qualify. And things like the roof/siding are not considered repairs, correct? These are home improvements? Meaning depreciable, and not expenses? Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 8, 2016 Report Share Posted March 8, 2016 In a very general sense, if the expenditure is for a betterment, restoration, or adaptation, then it is capital in nature and adds to basis as an improvement, not expensed. If you are fixing some damage, like patching a leaky roof, or patching holes in siding from storm damage, holes in the drywall, or painting, those are repairs. If you replaced the whole roof or all of the siding, those would be improvements. Repairs keep it in good condition but don't necessarily extend the life or add to the property value. 1 Quote Link to comment Share on other sites More sharing options...
Eric Posted March 8, 2016 Author Report Share Posted March 8, 2016 Alright, I'm feeling better about this now, thank you for the clarification. Still gonna drink though. 5 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 8, 2016 Report Share Posted March 8, 2016 56 minutes ago, Eric said: What if we replaced an old water softener? What if the brick chimney was rebuilt from the roof up, and then a stainless liner was added? What if the electrical service wasn't to code, and we moved it to the front of the house from the back? What if the stairs were all wonky and we shimmed them all to make them level and consistent in height? In some rooms we patched and painted existing drywall. Sounds like a repair. In other rooms we gutted down to the studs and put up new drywall. Sounds like an improvement. Here are my thoughts, others may disagree. It wouldn't be the first time. Water softener - doesn't benefit the office directly, so it isn't an improvement that could be depreciated for the office. If the repairman came, or you bought parts, and installed those to keep it functioning, then that would be a repair, but because you replaced the unit I'd call this is an improvement. Chimney used to vent the furnace and the electrical service would be improvements that do have benefit to the office and would be depreciated with a portion of that allocated to the office. Stairs - sounds more like an improvement than a repair to me, but your home is 150 yrs old. Were the stairs in unsafe condition, in a state of disrepair, treads cracked? If you could make a case for repair, then also indirect. However, if an improvement, again they must have some benefit to the office or they are not depreciable. Is the office on the second floor where the stairs give access? Patching drywall & painting would be indirect repairs. The gutting of rooms and new drywall would be an improvement, if not in the office itself then it's not depreciable for the office. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 8, 2016 Report Share Posted March 8, 2016 Gonna join you in that drink now. Cheers. 1 Quote Link to comment Share on other sites More sharing options...
BHoffman Posted March 8, 2016 Report Share Posted March 8, 2016 I prepare my next door neighbors' tax returns . After this crappy day, I added a bottle of single malt to his bill. 3 Quote Link to comment Share on other sites More sharing options...
Catherine Posted March 8, 2016 Report Share Posted March 8, 2016 11 hours ago, jklcpa said: Stairs - sounds more like an improvement than a repair to me, but your home is 150 yrs old. Were the stairs in unsafe condition, in a state of disrepair, treads cracked? If you could make a case for repair, then also indirect. However, if an improvement, again they must have some benefit to the office or they are not depreciable. Is the office on the second floor where the stairs give access? I will also chime in on stairs. In our house, we needed to replace the existing wall-to-wall carpet on the basement stairs as it was utterly worn out. Once it was off, though, we found that ten of the twelve steps had cracks running the entire length of the step. So that turned into a replace the treads and level the risers first, then paint it all. and *then* put down the new runner. If Eric's stairs are needed to get into the house and/or up to the home office, then the original scenario would be maintenance/repair (new runner) and what actually happened would be improvement (new treads, leveled risers, paint, then finally the carpet runner). Luckily, I neither take a home office deduction nor commonly use those stairs to get clients to the office - so it's a moot point for me. 1 Quote Link to comment Share on other sites More sharing options...
Eric Posted March 8, 2016 Author Report Share Posted March 8, 2016 Is it even worth tracking the improvements, though? I mean, lets say for the sake of argument (and because it's true) that I really don't care for keeping track of this stuff, and the only way I would ever do it is for some substantial financial benefit... and even substantial financial benefit is really just barely enough to get me to keep track of the money I blow on this money pit of a house. As far as I can tell, there isn't much reason to, unless as Terry D pointed out, the IRS changes the 121 exclusion rules. EDIT: And do you folks have lengthy interviews with your clients about these things? I imagine it's necessary. Of all the people I've talked to who have a Home Office, none of them seem to care about whether the expenses they're claiming are valid, and most of them are not. Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted March 8, 2016 Report Share Posted March 8, 2016 It is necessary. First, I want my clients to have the benefit of every deduction they are entitled to. Second, I want them to know that depreciation the home for the home office deduction constitutes a gain for that portion when and if the house is sold as well as the pros and cons. Third, we are required to file an accurate return and have to be very careful of the information the client presents to us. Simply put, some of them don't know when to keep their mouth shut. For example, I had a client this year ask me how to receive funds for some property that was sold to avoid paying any taxable gains. Before I could tell them anything, they informed me they received xxxx in cash and the rest via check so the cash wouldn't be traceable and that it shouldn't be included in their income and how would I handle this. My response: FIRED and I gave them the reasons. Next statement was for me to forget everything they just told me. No can do still FIRED. We can only take what our clients tell us or present to us at face value. Yes extensive questioning is needed from time to time but who can tell with any certainty they are being told the absolute truth. What I don't have knowledge of won't hurt me. What I do have knowledge of can be very costly. 5 Quote Link to comment Share on other sites More sharing options...
Eric Posted March 8, 2016 Author Report Share Posted March 8, 2016 Even if someone is completely honest, it seems like there are so many weird issues that are entirely situational. Claim the stairs if you use them to get to your office, for example. The Chimney is probably okay if it's attached to the furnace to heat the whole home. These aren't details that your average taxpayer is going to think about bringing up. 1 Quote Link to comment Share on other sites More sharing options...
BHoffman Posted March 9, 2016 Report Share Posted March 9, 2016 Well, they can either be dumb or crooked but not both and expect to stay outta trouble for very long..... Quote Link to comment Share on other sites More sharing options...
easytax Posted March 10, 2016 Report Share Posted March 10, 2016 On 3/9/2016 at 7:16 PM, BHoffman said: Well, they can either be dumb or crooked but not both and expect to stay outta trouble for very long..... EXCEPTION to this: Politicians can/may be/ seem to be -- BOTH 2 Quote Link to comment Share on other sites More sharing options...
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