Conference nyoss1::market_investing

>The reason I don't want to deduct mortgage interest and real estate taxes, 
>is that I take that on schedule A deductions.  I don't want to depreciate
>the room, because when I sell the house I will have to "repay" or pay taxes
>on the amount that was depreciated (right?).  
    
    Mark, I don't think it really matters _where_ you take the mortgage
    interest and RE taxes deductions, at least not as far as your total
    taxes go. However, you can use the portion that's business related to
    directly reduce the income generated by the business in your home
    office. I think this can help reduce your self-employment taxes due.
    
    As to not taking deductions now because you'll have to pay the tax
    anyway at a later time, you're missing a major point. By deferring
    those taxes, you'll get to use that money NOW. Then when you sell the
    house you'll be paying the taxes back with dollars that are worth less
    in terms of real buying power due to the effects of inflation. It's
    called paying with 'cheaper dollars' in most money books.
    
    I'd suggest that you seriously consider paying a tax adviser for some
    help with your return. It sounds like his or her services could be
    cheap when compared with what you may be overpaying in taxes.
    
    Harry
    

    Harry,
    
    You make some very valid points.  Perhaps my rationale is off, but
    this is what I think.  
    
    I agree about the real estate taxes and mortgage interest, you are
    absolutely right, it does not matter (the net deduction is the same)
    plus I have the advantage of reducing my self-employement taxes.
    
    Depreciation is the one that gets me thinking (or confused).  If I
    never depreciate, I never have to pay taxes on the sale of my house,
    as the proceeds from the sale of the house will usually be rolled
    forward into the next house purchase.  If I do depreciate the office
    in the house, I get a benefit now, but end up paying taxes later when
    the house is sold.  I think my confusion lies in the fact that I am
    not sure what it is that I have to pay (at the time of the house
    sale). 
    
    I am going to try plugging all the values in and see what I come out
    with.  
    
    Thanks, Mark
    

    Mark, what you're going to pay when you sell the house is the taxes on
    the amount of depreciation that you took. In real numbers, it's a wash.
    However, you'll be paying the taxes with the tax savings from the past,
    but the dollars will then have less purchasing power and you'll have
    had all that time to use them for other things.
    
    You get the money now, use it for whatever you want until you sell the
    house, then give it back to the IRS. Think of it as an interest-free
    loan. :-)
    
    Harry
    

>Questions 1 and 2 appear to reference square footage, I believe I can
>also use number of rooms as in 1/7 = 14%.  Is that allowed?

I'd be pretty careful with it.  Especially if the 1 room is smaller than
the "average" other rooms.  The square footage method is much safer, but
I will try to look up the specific rule(s) (if any).

>I do not want to deduct mortgage interest, real estate taxes, ...

WHY???  One of the significant differences of the 8829 (over using an
attached statement) is that now these expenses which are deductible
anyway on a schedule A can be used to put your business into a NET loss
situation.  With the "statement" rules, you only took as much as would
reduce your SE income to zero and took the rest on the "A".  With a "C"
and an 8829, you show the entire net loss.  This is goodness.  It reduces
your AGI, which reduces the 7.5% and 2% threshholds for other things on
the "A".  On the other hand, if you're showing a net profit, you have to
pay SE tax on it at 15.3%.  Taking everything allowable on the 8829 to
reduce the NET profit from the "C" saves you the SE tax.

>              I strictly want to deduct 14% of my home owners insurance
>and utilities (heat, electric, water).  ...

This is OK, but may be a bit of overkill...gas/electric/insurance YES.
Water bill, probably NO, unless you can show that the water use is an
integral part of your business.  I'm not questioning you, but the IRS
might.  Also, are you remembering that the "business-percentage" of other
expenses counts?  Things like general maintenance, repairs, etc that affect
the entire house?

>The reason I don't want to deduct mortgage interest and real estate taxes, 
>is that I take that on schedule A deductions.  I don't want to depreciate
>the room, because when I sell the house I will have to "repay" or pay taxes
>on the amount that was depreciated (right?).  

WHOAH!  Major (but common) misunderstanding!!!!!!!!!!!!!!!!!!!!!!!!!

First, the term you're looking for is "recapture".  You have to recapture
depreciation when you sell the property.  But the way the rules read is:

"...recapture of depreciation allowed or allowable..."

Killer keyword: allowable.  The way the rules work, you have to recapture
the depreciation WHETHER YOU TAKE IT OR NOT!  Whether or not you actually do
this is entirely up to you, but at least you'll know its coming if they
(the IRS) take a microscope and start crawling around in your returns.

To do it "correctly", you have to recapture 100% of the *allowable*
depreciation on business use property when the property is sold.  Little
details like "did you actually take the depreciation?" are irrelevant.
The key is "was the depreciation allowable", or "could you legally have
taken it?"  If so, you are supposed to recapture it.

For business use of home, you have two choices about what kind of
depreciation you will take.  The buzzwords are MACRS or AMT.  MACRS lets
you take 3.636% per year (after the first year), AMT lets you take 2.5%
per year (after first year).  The difference between the two numbers
(1.136%) is also important.  If you take MACRS, the difference requires two
special things.  (1) You have to fill out a 6251 (AMT) form and declare the
difference.  (2) When you finally do sell the property, the difference is
recaptured differently then the "base" AMT amount.  General recommendation:
Unless you fully understand the difference, take the lower one at 2.5%.

>Can I fill this form out for just insurance and utilities?  and if so,
>how do I do that?  or, is there a better way to approach this?

You can use the form for just insurance and utilities, but you probably
don't want to.  Get someone to explain it to you in excruciating detail
so that you really understand what you're choosing, then give it your best
shot.

I have to agree with .1:  You probably would be ahead to get some real
advice, even if you have to pay for it.  Your specific situation will have
a big impact on how you want to treat these things for IRS purposes.  IRS
rules regarding depreciation and recapture are fairly complex, and it gets
even worse if you have the office-in-home during the same year you sell the
property.  Even if you don't get advice now, be sure you do before you file
your tax returns in the year you sell the home...

Steve
    

    This feedback is good, and this is starting to make more sense.
    
>"...recapture of depreciation allowed or allowable..."
    
>Killer keyword: allowable.  The way the rules work, you have to recapture
>the depreciation WHETHER YOU TAKE IT OR NOT!  Whether or not you actually do
>this is entirely up to you, but at least you'll know its coming if they
>(the IRS) take a microscope and start crawling around in your returns.
    
    I spoke to the IRS yesterday on the phone and they said the same
    about recapturing: "Wether you take it or not".
    
    I hate asking something that can be looked up, but I don't have the
    instructions for the form.  On line 35, enter the smaller of your
    home's adjusted basis or its fair market value.  I know the fair
    market value, as I recently had an appraisal done for a refi.
    Is the "adjusted basis" the value of the house less depreciation
    already taken?  If so, what is the starting point (purchase price
    less land value), and what about the last 3 years that I did not
    depreciate when I was claiming an office in the home, do I reduce
    the value by 2.5% for each of the three years anyways?
    
    On mortgage interest and RE taxes, what I claim on this form has to
    be subtracted from the Schedule A amounts, right?
    
    Oh what fun this is.  Thanks, Mark  

    >less land value), and what about the last 3 years that I did not
    >depreciate when I was claiming an office in the home, do I reduce
    
    You should file an amended return for each of the last 3 years. You've
    probably got quite a chunk of change coming to you. Paying for _good_
    tax advice would have gotten this money for you long ago. :-(
    
    Harry
    

    Adjusted basis comes from the following:
    		Original purchase costs of the house
    Plus	Costs of making the purchase (fees, etc paid by you.)
    Minus	Moving expenses you deducted from purchase costs
    Minus	Casualty losses you've already written off
    Minus	Depreciation taken (but NOT the current series)
    Plus	Captial improvements you've made (add room, fence, etc)
    Adjusted	By any "deferred gain" you rolled in from a previous home
    Less	Land value.
    
    This will be the same once you calculate it, forever, unless you add
    more capital improvements or take casualty losses.  From this number
    (times business use percentage) you multiply the depreciation
    percentage to get depreciation for each succeeding year.  AMT
    depreciation in the FIRST year of business use is not 2.5%, but can be
    found in a depreciation table...it's based on which month you put said
    asset into service.
    
    If you've taken depreciation for a prior business, you would subtract
    it when calculating the basis for this depreciation-series.  Once you
    come up with an adjusted basis, you take the lesser it or the FMV and
    that becomes your "depreciable basis".  The percentage tables assume
    that the depreciable basis stays constant over the life of the asset. 
    
    If you change the business use percentage of the home, you multiply the
    new use-percentage by the same depreciable basis, but don't refigure
    said basis.
    
    The amounts you take as business use of home do indeed get subtracted
    from the schedule "A" entries.  (No "double-dipping".)
    
    Steve

    IRS Helpline...
    
    Spoke to them the other day and they confirmed that I should be taking
    the depreciation.
    
    Spoke to them today, the guy said, "don;t have to if you don't want
    to".  He also said I would not have to recapture something I never
    took.  I asked him to verify with his supervisor, he came back on the
    phone and said, take the depreciation, because the IRS assumes you
    have been taking it when you sell your house.
    
    They are going to send me 1040X Amended forms going back to 1988.
    This guy told me I can take a percentage of my RE taxes and mortgage
    interest going back all those years, plus depreciation, plus utilities,
    against my Schedule C income for each of those years.  Does this sound
    right?
    
    He is also sending me the instructions for the 8829 form.  HE said in
    prior years there was a worksheeet that could be used.  Has anything
    changed over those years besides the fact that there is now a form to
    be sent in?
    
    Thanks for all your great advice.  Mark
    

    RE taxes, mortgage interest: You take a % against your "C" income, but
    remember to adjust your "A" deductions down for the $ amount you apply
    to the "C".  (You still come out ahead because offsetting "C" income
    reduces your SE tax and lowers your AGI, which lowers the 2% and 7.5%
    threshholds on the "A"...)
    
    Utilities, depreciation: Yup.
    
    Also take bus % of: Home-owners insurance, general repairs/upkeep that
    applied to entire house (like repainting, replacing heat/AC units, etc)
    
    Also take 100% of repairs/upkeep that apply exclusively to the
    business-use area.
    
    I don't know about any IRS-supplied worksheet that supports
    business-use-of-home...seems like you were supposed to attach a
    "statement of business use..." to your 1040.  H&R Block has a
    pre-printed statement (just fill in the blanks) that you can
    probably get a copy of to use for a guideline, or some of the
    "Do It Yourself" tax books will have something in them.
    
    You will have to twiddle several numbers to do the 1040X forms.  If you
    have the patience, maybe you should run through a new batch of forma
    for the prior years.  (A, C, SE, and maybe a 1040)  Attach them to the
    1040X along with (carefully labelled) copies of the originals and refer
    to them in your "explanation of differences".  This will reduce the
    amount of narrative you have to provide and show very clearly where
    your additional refund is coming from.
    
    I love it when somebody beats the IRS out of more money.  :-)
    
    Steve

    My head has been spinning with different thoughts on all of this.
    As I stated before I never took a percentage of mortgage interest (the
    real biggie) and RE taxes and depreciation.  I figure an approximate
    reduction of $1200 for each of the three years, I will get back about
    $1000 over those three years for just that.
    
    I have not received all the info yet, but I have been reading
    everything I can get my hands on, and I am now starting to question
    rather I qualify for business use of home.  My Schedule C income
    comes from my second job as a realtor.  I do all my work from my
    home office, (I never go to our main office), everything is done
    from my home.  I have the desk, file cabinets, book cases, phone,
    etc.  I am on the phone calling clients and prospects all the time.
    I have clients occasionally stop in to my home office to review
    listings, fill out forms, etc.  But most of my physical client meetings
    are on the road.  BTW, I gave up on vehicle expenses several years ago,
    because I felt that the record keeping, and filling out of the forms
    was getting ridiculous.  

    Anyone care to offer their opinions on my validity of business use of
    home.
    

    >are on the road.  BTW, I gave up on vehicle expenses several years ago,
    >because I felt that the record keeping, and filling out of the forms
    >was getting ridiculous.  
    
    Think about how much actual time is involved in keeping the records.
    Perhaps 4-5 hours total per year? Next, figure how much you save on
    your taxes with the use-of-vehicle deductions. Divide the tax savings
    by the number of hours spent doing the paperwork. Don't you wish you
    made that much _every_ hour of the day!!! I'll take that 'ridiculous'
    money and spend it on something I want so Congress can't use it for
    some boondoggle. :-)
    
    Harry
    

    Your mileage may vary!
    
    20k is a significant amount of miles.  My mileage when I was keeping
    track, and it is about the same year to year, was always under 1k.
    Since this is a second income for me, I am "active" with a small
    number of clients on a yearly basis which "usually" result in a sale.
    I try to work only with folks who I feel are serious about buying or
    selling real estate.
    
    Mark

    As long as the area of your home is used exclusively for business, you
    should qualify.  It doesn't matter that you also meet clients out on
    the road.
    
    Re mileage, I just keep a book in the car and record the mileage and
    take the standard mileage rate.  That way you can ignore keeping track
    of all of the car-related expenses.
    
    Bob