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Rules for Home Office Depreciation for Businesses
Posted By Jim On 10/17/2006 @ 1:04 pm In Taxes | 6 Comments
As I blogged earlier this week, I plan on taking the home office deduction  this year against the income generated from my sole proprietorship. In addition to the home office deduction, I am qualified for the home office depreciation deduction as well (if you qualify for one, you qualify for the other) so I will also be taking that. While the rules for qualification are the same, the depreciation deduction is slightly more involved (since it’s not a simple summation of your expenses).
If you bought an office elsewhere for business purposes, you would be able to deduct the cost of that office across 39 years. With the home office depreciation deduction, you’re treating your home office as a purchase of that space and you can deduct that cost over 39 years. By definition, depreciation is “an allowance for the wear and tear of your home used for business” so it would not apply to the land the property sites on.
How Do You Calculate the Depreciation Deduction?
First, you must collect several important pieces of information:
So for example, my house was appraised at $299,999 (I’m not sure if that’s the value I should use or if I should use the sale price of $295,000) and my home office is approximately 5% of the house (I’ll have to measure it to be sure), so I should be able to depreciate about $15,000 over 39 years. According to the MACRS Depreciation Tables from Publication 587  (I’ve referenced 2005 since the 2006 one hasn’t been released yet), since my business started in January 2006, I would be able to depreciate 2.461% of the $15,000, or $369.15. It’s not a lot of money, but it’s something.
Since I will be depreciating the one room in my house, I’ll have to recapture it when I sell the house. You simply reduce the value of the home by some amount and you “pay” for the extra gain. For me this will be a non-issue, in terms of a net effect, because when you sell a house, you don’t have to pay up to $250,000 of the net gain if you buy another house. That limit increases to $500,000 for married couples (which I will likely be by then). So in terms of decision making, recapturing this depreciation is immaterial.
Whew! That was a lot of content and there is a good chance I got something in there wrong (maybe the math), so if you did wade through it (thank you!) please please please let me know if I messed something up!
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 home office deduction: http://www.bargaineering.com/articles/home-office-deduction-for-businesses.html
 MACRS Depreciation Tables from Publication 587: http://www.irs.gov/publications/p587/ar02.html#d0e1520
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