Should You Depreciate Your Home?
Yes! Always! No exceptions!
Unfortunately, some family child care providers are told by their tax preparer not to depreciate their home on their tax return (Form 8829 Expenses for Business Use of Your Home). You will be making a big mistake if you listen to anyone who tells you this.
Why? Two reasons.
Reason #1: Claiming depreciation on your home represents a big deduction and lower taxes for you. Home depreciation is based on the purchase price of your home (in most instances). Let's say you bought your home for $100,000 and your Time-Space Percentage is 40%. The business portion of your home is $40,000 ($100,00 x 40%) that would depreciate over 39 years. The represents about a $1,000 business deduction each year ($40,000 divided by 39 years). Not bad!
See my article "How to Depreciate Your Home" for more details.
Reason #2: When you sell you home you face two possible taxes. The first is capital gains tax on the profit on the sale of your home. You can avoid this tax on the first $250,000 of profit if you are single or $500,000 profit if you are married. Nice! Most child care providers can avoid worrying about this tax.
The second tax is tax on the house depreciation that you claimed while using your home for business. This tax is unavoidable and must be paid when you sell your home. The amount of tax you will owe will depend on your family's tax bracket at the time. The tax rate will be either 15% or 25%. Let's say you were in business for six years and claimed $1,000 in depreciation each year. Then you go out of business and five years later you sell your home. You will owe tax on $6,000 and will pay either $900 or $1,500.
What if you don't depreciate your home?
You will still owe $900 or $1,500 in taxes!
That's because the IRS rules clearly state that if you are entitled to claim the depreciation deduction on your home, you will be treated as if you did when you sell it. If house depreciation is "allowed or allowable", you must pay tax on it when you sell your home. The only situation where a provider would not be "allowed" to claim house depreciation is if they have a business loss. See IRS Publication 523 Selling Your Home.
Therefore - always depreciate your home, no matter what! You will owe the same tax later even if you didn't depreciate it and you will have lost a lot of deductions.
If you have not depreciated your home in the last three years, amend your tax return (Form 1040X) and get a refund.
If you have not depreciated your home for more than three years, use IRS Form 3115 to recapture all previously unclaimed depreciation on your current tax return. See my article, "How to Claim Previously Unclaimed Depreciation."
Tom Copeland - www.tomcopelandblog.com
Image credit: https://www.apartments.com/charming-3-bedroom-home-in-south-st-paul-south-saint-paul-mn/tj411xb/
For more details see my Family Child Care Tax Workbook and Organizer.
