If you have sharpened your pencil one more time in an effort to find another tax deduction before the April 15 tax deadline, don’t forget to take another hard look at your home, mortgage and inside the garage.
According to Rob Keasal, certified public accountant with the Seattle office of Anderson Zurmuehlen & Co., the Internal Revenue Service has provided some clarity on capital gains exclusion when a taxpayer is forced to move because of unruly neighbors.
Typically, single taxpayers can pocket $250,000 of tax-free gain ($500,000 for married couples) every two years upon the sale of their primary residence. However, if a homeowner is forced to move sooner because neighbors have refused to curtail obnoxious all night partying, complete with ear-shattering foosball tournaments or other unbearable activities, the homeowner could meet special requirements.
“What the IRS considers extraordinary conditions or a ‘hardship test’ has now been allowed for unruly neighbors,” Keasal said. “This not only helps define what the hardship test can be but also gives a possible break to people who had to move sooner than they normally would have moved.”
Another potential deduction includes the space in a residence used as a home office, but be sure you understand how that space will be treated by the IRS down the road. A home office deduction is comprised mainly of depreciation, utilities and insurance. For example, if a home has 2,500 square feet and the attached garage now deemed “the office” is 250 square feet, then 10 percent of the utilities and insurance are deductible.
The actual office depreciation is 10 percent of what would be a depreciation deduction if the entire home were being depreciated for tax purposes. (Depreciation is not allowed on a typical principal residence, so the square footage allotted to “residence” would not qualify.) Supplies and other expenses directly related to the home office are fully deductible.
The area used for your home business can be depreciated using the 39-year depreciation method. The lower of your home’s adjusted cost basis, or its market value on the day business use began, can be the starting points.
On Dec. 23, 2002, the IRS issued new regulations concerning gain on home sales. As long as the home office was in the same structure (attached garage) and not separated from the home, only the depreciation taken for the home office after May 6, 1997, is subject to tax.
Here is the wording from the regulation:
“Taxpayers need not allocate gain between business and residential use if the business use occurred within the same dwelling unit as the residential use. They must pay tax on the gain equal to the total depreciation they took after May 6, 1997, but may exclude any additional gain on the residence, up to the maximum amount. If the business use property was separate from the dwelling unit, they would allocate the gain and be able to exclude only the gain on the residential unit.”
In a capsule, if you bought your home for $150,000 and sold it for a net figure of $300,000, your capital gain would amount to $150,000. However, because your business was based in a storage shed that was separate from the home (not an attached garage) that portion does not escape the new primary residence exclusions. That means 10 percent, or $15,000 (the 250 square feet of office space) would be taxable.
One way of possibly avoiding the home office tax would be to eliminate your home business two years before selling the home. If you can find another place to work, you could revert the usage back to a 100 percent primary residence.
Because depreciation can be confusing, it’s always best to consult an accountant or a tax attorney. The Internal Revenue Service’s Publication 587 “Business Use of Your Home” is accessible on the Internet at www.ustreas.gov.
If your garage – detached or attached – includes a new hybrid car (known as a clean-fuel vehicle) purchased last year you could get a deduction of up to $2,000. That amount dips to $1,500 on your 2004 return.
A hybrid car typically uses both a gas-fueled engine and an electric motor. The popular hybrids now on the market are the Honda Civic Hybrid, Honda Insight and Toyota Prius.
Tom Kelly, former real estate editor for The Seattle Times, is a syndicated columnist and talk show host. Send questions and comments to news@tomkelly.com.
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