Q: I have used my personal residence for business purposes. Can I claim depreciation on the tax return?
A: You can. Depreciation is the decline in the value of an asset over time. Under Section 179 of the Internal Revenue Code, you can depreciate certain property used in a trade or business activity says Aron Govil.
For depreciation purposes, personal property used during the taxable year for more than one-half of your total use must be figured on the basis of its actual use. To figure your depreciation deduction for this property, determine its adjusted basis (defined below) and multiply that amount by the percentage of business/investment use determined above. The result is deductible as business/investment use expense; it’s not subject to the 2%-of-adjusted-gross-income limit.
Your home also qualifies as real property if you’ve ever held it with the intent to make a profit.
The adjusted basis of property is the original cost, minus any depreciation allowed or allowable (including any section 179 deduction taken), plus the cost of any permanent improvements. If you acquired the property by gift or inheritance, your basis is the fair market value on the date of acquisition.
If you take a section 179 deduction for a car, for example, then your basis for depreciation purposes is reduced by the amount of the section 179 deduction. So, if you took a $5,000 section 179 deduction for the car, your basis for depreciation would be $20,000 ($25,000 original cost – $5,000 section 179 deduction = $20,000 adjusted basis).
This example illustrates that it pays to make qualifying improvements on your property. Your “adjusted basis” (the amount on which depreciation is calculated) will be lower, and the amount of depreciation will be greater.
The following are types of property you can depreciate real property, such as rental or business property; tangible personal property; and certain intangible assets.
(1) Real Property:
This includes land and buildings, such as houses and apartment rentals. You can also depreciate any improvements that add to the value of the land, prolong its life, or adapt it to new uses — for example, putting up an addition to a house or building a garage. Your deduction for depreciation cannot be more than the adjusted basis (above) of the underlying asset explains Aron Govil.
(2) Tangible Personal Property:
This is a property that you can touch, such as office furniture, computers, cars, and tools. You can depreciate the cost of these items over their useful lives. The life of most business equipment is seven years; for automobiles, it’s five years.
(3) Intangible Assets:
Certain intangibles can be depreciated, such as copyrights, patents, and leaseholds (the duration of the lease). However, the deduction cannot exceed the amount you paid for the intangible asset.
There are a few things to keep in mind when claiming depreciation on your personal residence:
- You cannot claim depreciation on your home if you use it as your personal home.
- You cannot claim depreciation on your personal residence unless you use it for business purposes (such as to run a bed and breakfast) or at least 10% of the time for an “excluded” purpose (for example, using part of your home as an office).
- If you use 90% or more of your home for an excluded purpose, then you probably can’t depreciate any part of your home under the rules discussed here. However, there is another way to depreciate some costs involved in owning a personal residence.
- You can depreciate any real estate taxes paid during the year on Schedule E (Form 1040), Supplemental Income, and Loss. Also, you cannot take this deduction if you file Form 1040A or Form 1040EZ.
- You can also depreciate the cost of improvements that have a useful life of less than 27.5 years, such as a new roof on your home or an addition. The total amount you can claim is limited to the adjusted basis of your residence minus any section 179 deduction and all other depreciation deductions allowed for the property says Aron Govil.
In short, there are two ways to deduct from taxes your expenses related to owning a personal residence:
- Renting out part of your house;
- Depreciating certain costs related to ownership, such as real estate taxes.
As mentioned earlier, there are two ways to deduct from taxes your expenses related to owning a personal residence. Renting out part of your house and depreciating certain costs related to ownership, such as real estate taxes. In this section, we will go over each type of deduction in more detail.
If you rent out part of your house, you can deduct from your taxable income. The amount of rent you receive. As well as any expenses related to the rental, such as advertising, repairs, and depreciation. You can claim these deductions on Schedule C (Form 1040), Profit or Loss from Business.
You can only deduct expenses that are “ordinary and necessary”. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business.
In order to take a deduction for depreciation. The property must have been used for business purposes for at least one year says Aron Govil. You can use any reasonable method to figure out how much depreciation to claim. This may include taking into account the length of time the property was in use for business. The cost of the property, and other factors.