How to Depreciate Your Home
Every family child care provider who owns a home should depreciate it and claim a substantial tax deduction.
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 2010 for $250,000 and you started your business in 2019. Look at your property tax assessment for 2019 to estimate the value of your home in 2019. If the value in 2019 was $290,000, we would use the lower $250,000 amount for depreciation.
$250,000
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 2010 was $50,000.
Note: if you don't know the value of your land at the time you bought your home divide the current assessed value of your land by the current assessed value of your home and multiply that percentage by the purchase price of your home to determine the value of the land at the time you bought your home. For example, if the current assessed value of your land is $60,000 and current assessed value of your home is $290,000, the land currently is worth 21% of the current value of your home ($60,000 divided by $290,000 = 21%).
Multiply 21% by $250,000 to get a an estimated value of the land in 2010 of $52,500 ($250,000 x 21% = $52,500).
$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 2015 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 2019 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 2019, we will use this percentage for your 2020 tax return.
$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: https://cupofjo.com/2016/06/st-paul-house-tour-minnesota/
For more on how to depreciate your home, see my Family Child Care Tax Workbook and Organizer.
