How to Depreciate Your Home

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Every family child care provider who owns a home should depreciate it and claim a substantial tax deduction.

I’ve written a previous article about why you should never listen to anyone tell you not to depreciate your home.

Here’s a summary of how to depreciate your home broken down into five steps.

First – Determine the portion of your home’s value that you will use to depreciate. You need to use the lower of these two numbers: the purchase price of your home or the fair market value of your home at the time you first started using it in your business.

Let’s say you bought your home in 2004 for $250,000 and you started your business in 2011. Look at your property tax assessment for 2011 to estimate the value of your home in 2011. If the value in 2011 was $260,000, we would use the lower $250,000 amount for depreciation.

$250,000

Note: Because of housing market decline in recent years it’s possible your home was worth less when your business began than when you purchased it.

Second – Subtract the value of the land from your home value. If you are using the home value at the time you purchased your home, use the land value at that time. We will assume the land value in 2004 was $50,000.

$250,000 – $50,000 = $200,000

Three – Add to your home value any home improvements (remodeling, room additions, outdoor deck, etc.) and land improvements (fence, patio) that were done to your home before you went into business. Let’s assume you added a deck in 2006 for $5,000 and remodeled your basement and bathroom for $20,000.

$200,000 + $5,000 + $20,000 = $225,000

Note: This amount will never change as long as you are depreciating your home.

Four – Multiply this adjusted value of your home by your Time-Space Percentage each year. The result is the business portion of your home that you can depreciate.

Let’s say your Time-Space Percentage for 2012 was 35%:

$225,000 x 35% = $78,750

Note: If your Time-Space Percentage changes in future years this number will go up or down.

Five – Calculate the amount you can depreciate in the current year. Since 1994 you must depreciate your home over 39 years. In the first year of depreciation you will use a percentage based on the month your business began (see IRS Publication 587 Business Use of Your Home or my annual Family Child Care Tax Workbook for these percentages). After your first year in business, use 2.564%. Since you began your business in 2011, we will use this percentage for 2012.

$78,750 x 2.564% = $2,019

Claim $2,019 as your home depreciation deduction on Form 8829 Expenses for Business Use of Your Home.

As you can see, depreciating your home can represent a substantial tax deduction. If you haven’t depreciated your home in past years you can either amend your tax return back three years and claim a refund, or file IRS Form 3115 to recapture unclaimed depreciation further back than three years.

Tom Copeland – www.tomcopelandblog.com

Image credit: freerealestateclipart.com

2014 TW smallFor more on how to depreciate your home, see my Family Child Care Tax Workbook and Organizer.



Categories: Depreciation and Home, Home Depreciation, Record Keeping & Taxes

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27 replies

  1. My husband and I are both self employed. He has an auto frame repair shop. I have been doing daycare for my grand kids for the last 4 yrs. We have had the same CPA do our taxes for the last 17 yrs. If I have never depreciated my home should I wait until after my taxes are filed this yr to talk to him about form 8829?

  2. I was told not to do this because when I sell my house I will have to deal with tax implications from depreciating it. Is this true?

  3. Elizabeth – No! No! No! Read the article I linked to in this article. It says that when you sell your home you will have to pay tax on any depreciation your claimed, or were entitle to claim while you used it for your business. In other words, you will have to pay taxes on the amount of depreciation you didn’t claim, but could have! You will not save any taxes later by not depreciating your home now. Instead, you are losing valuable deductions now. So, amend your tax return or file Form 3115 if you haven’t depreciated your home for more than 3 years and get refunds. Call me at 651-280-5991 if you have questions about this. You don’t want to listen to what your tax preparer is saying.

  4. Donna – I assume you are being paid to care for your grandkids. The only situation where you can’t depreciate your home is if you show a loss on Schedule C. You should have been filing Form 8829 each year. If not, start filing it this year and claim house expenses, including depreciation. You should also amend your tax return, claim house expenses and depreciation and get refunds.

  5. We don’t own the house officially as we live with my mother in law. My husband will be inheriting the home in the case of her death. Would it be better to transfer ownership?

  6. Yes, it would be better if you owned the home so you can claim house expenses. However, consult with a tax professional before doing so. Having her turn over the home to you before her death could trigger gifts taxes. This is complicated, so talk to an expert.

  7. I have been running daycare from my home since September of 2008 and have never claimed depreciation. I would like to start filing this year and for the previous years as well. I have been looking at some of the things we can write off but am unsure if I am able too. For example, I bought my livingroom furniture the year I got married (2007) for $2,000 but don’t have the reciept. Am I still able to claim it? Same goes for a Laptop, tv and beds. I also am unable to locate the reciept for an Ipad I purchased in November of 2013, is there a way to still write it off?
    Very overwhelmed,
    Rachel

  8. I have a home daycare since January 2009. I was renting the house since then until I bought the house in October 2012. Can I claim depreciation? since when?

  9. You can start claiming home depreciation as of October 2012.

  10. In your last response you say I can start claiming depreciation as of October 2012. Can I start with 2013 and then avoid the hassle of an amendment?
    Thank you Tom!

  11. Yes. If you start depreciating in 2013, you must treat 2013 as year 2 of your depreciation.

  12. According to your response If I start depreciating in 2013 and treat it as second year what should I do with form 4562? Would it be necessary?

  13. After the first year, show your house depreciation only on Form 8829. No further need for Fotm 4562.

  14. I have run a in-home daycare since 2005 and I have never claimed the depreciation on my home. IS there anyway to claim depreciation for the previous years or am I out of luck?

  15. Yes, you can claim previously unclaimed house depreciation, using IRS Form 3115. See my article on this:http://www.tomcopelandblog.com/2011/09/how-experienced-providers-an-uncover-hidden-deductions-.html

  16. You can use IRS Form 3115 to claim previously unclaimed house depreciation. See my article on this:http://www.tomcopelandblog.com/2011/09/how-experienced-providers-an-uncover-hidden-deductions-.html

  17. Yes, you can recapture previously unclaimed depreciation by using IRS Form 3115. See my article about this:http://www.tomcopelandblog.com/2011/09/how-experienced-providers-an-uncover-hidden-deductions-.html

  18. claiming depreciation in the first year, your workbook says to write hy in for half year, what do you write for the 2nd or 3rd year and all the rest?

  19. Tom,
    I started providin childcare in 1986 through 2007. When I sell do I need to claim depreciation for all of those years? Somewhere in attending one of classes I remember there was some klnd of adjustment in the 1990’s
    Please advise. I am now selling (2016)

  20. This is my second year and first full year doing home daycare. Last year I was completely oblivious to what I was able to write off on my taxes. I had used a tax preparer that I was referred to from another provider but he didn’t ask for any other information. Because of this my house was not depreciated last year (2015 tax year). I am now doing my own taxes this year and was wondering if I needed to redo my taxes from last year before I do them this year? I was also planning on going back to redo them after I took care of this year’s first. Any additional advice? Thank you!

    • You do not need to fix your 2015 tax return before filing your 2016 tax return. You will want to amend your 2015 to claim house depreciation and any other expenses you previously missed.

  21. Use your time-space % for that year to determine the business portion of the home you can depreciate. Then apply the depreciation percentage. The depreciation percentage after the first year is always 2.564%. In the first year the depreciation percentage is based on the month you first started using it for your business. See the Instructions to Form 4562, page 20, Table E to see what percentage to use in the first year: https://www.irs.gov/pub/irs-pdf/i4562.pdf

  22. I believe there is a mistake on the depreciation years. Residential property should be depreciated to 27.5 years and 39 for commercial

  23. No, it’s not a mistake. A family child care provider who uses her home for her business is using her home for nonresidential purposes when she is caring for children, so the nonresidential rules apply – 39 years. 27.5 years is for residential rental property. Providers aren’t renting their home for their business.

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