If you own your home and qualify to deduct expenses for its business use, you can claim a deduction for depreciation. Depreciation is an allowance for the wear and tear on the part of your home used for business. You cannot depreciate the cost or value of the land. You recover its cost when you sell or otherwise dispose of the property.
Before you figure your depreciation deduction, you need to know the following information.
- The month and year you started using your home for business.
- The adjusted basis and fair market value of your home (excluding land) at the time you began using it for business.
- The cost of any improvements before and after you began using the property for business.
- The percentage of your home used for business. See Business Percentage, earlier, under Figuring the Deduction.
The adjusted basis of your home is generally its cost, plus the cost of any permanent improvements you made to it, minus any casualty losses or depreciation deducted in earlier tax years. For a discussion of adjusted basis, see Publication 551.taxmap/pubs/p587-003.htm#en_us_publink100013781
A permanent improvement increases the value of property, adds to its life, or gives it a new or different use. Examples of improvements are replacing electric wiring or plumbing, adding a new roof or addition, paneling, or remodeling.
You must carefully distinguish between repairs and improvements. See Repairs, earlier, under Deducting Expenses. You also must keep accurate records of these expenses. These records will help you decide whether an expense is a deductible or capital (added to the basis) expense. However, if you make repairs as part of an extensive remodeling or restoration of your home, the entire job is an improvement. taxmap/pubs/p587-003.htm#en_us_publink100013782
You buy an older home and fix up two rooms as a beauty salon. You patch the plaster on the ceilings and walls, paint, repair the floor, install an outside door, and install new wiring, plumbing, and other equipment. Normally, the patching, painting, and floor work are repairs and the other expenses are permanent improvements. However, because the work gives your property a new use, the entire remodeling job is a permanent improvement and its cost is added to the basis of the property. You cannot deduct any portion of it as a repair expense.taxmap/pubs/p587-003.htm#en_us_publink100013783
Decrease the basis of your property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you properly selected. If you deducted less depreciation than you could have under the method you selected, decrease the basis by the amount you could have deducted under that method. If you did not deduct any depreciation, decrease the basis by the amount you could have deducted.
If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted, plus the part of the excess depreciation you deducted that actually decreased your tax liability for any year.
If you deducted the incorrect amount of depreciation, see How Do You Correct Depreciation Deductions in chapter 1 of Publication 946.taxmap/pubs/p587-003.htm#en_us_publink100013784
The fair market value of your home is the price at which the property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Sales of similar property, on or about the date you begin using your home for business, may be helpful in figuring the property's fair market value. taxmap/pubs/p587-003.htm#en_us_publink100013785
If you began using your home for business before 2008, continue to use the same depreciation method you used in past tax years.
If you began using your home for business in 2008, depreciate the business part as nonresidential real property under the modified accelerated cost recovery system (MACRS). Under MACRS, nonresidential real property is depreciated using the straight line method over 39 years. For more information on MACRS and other methods of depreciation, see Publication 946.
To figure the depreciation deduction, you must first figure the part of the cost of your home that can be depreciated (depreciable basis). The depreciable basis is figured by multiplying the percentage of your home used for business by the smaller of the following.
- The adjusted basis of your home (excluding land) on the date you began using your home for business.
- The fair market value of your home (excluding land) on the date you began using your home for business.
If 2008 was the first year you used your home for business, you can figure your 2008 depreciation for the business part of your home by using the appropriate percentage from the following table.
Table 2. MACRS Percentage Table for 39-Year Nonresidential Real Property
|Month First Used for Business||Percentage To Use|
Multiply the depreciable basis of the business part of your home by the percentage from the table for the first month you use your home for business. See Table A-7a in Appendix A of Publication 946 for the percentages for the remaining tax years of the recovery period. taxmap/pubs/p587-003.htm#en_us_publink100013787
In May, George Miller began to use one room in his home exclusively and regularly to meet clients. This room is 8% of the square footage of his home. He bought the home in 1998 for $125,000. He determined from his property tax records that his adjusted basis in the house (exclusive of land) is $115,000. In May, the house had a fair market value of $165,000. He multiplies his adjusted basis (which is less than the fair market value) by 8%. The result is $9,200, his depreciable basis for the business part of the house.
George files his return based on the calendar year. May is the 5th month of his tax year. He multiplies his depreciable basis of $9,200 by 1.605% (.01605), the percentage from the table for the 5th month. His depreciation deduction is $147.66.taxmap/pubs/p587-003.htm#en_us_publink100013788
Add the costs of permanent improvements made before you began using your home for business to the basis of your property. Depreciate these costs as part of the cost of your home as explained earlier. The costs of improvements made after you begin using your home for business (that affect the business part of your home, such as a new roof) are depreciated separately. Multiply the cost of the improvement by the business-use percentage and depreciate the result over the recovery period that would apply to your home if you began using it for business at the same time as the improvement. For improvements made this year, the recovery period is 39 years. For the percentage to use for the first year, see Table 2, earlier. For more information on recovery periods, see Which Recovery Period Applies in chapter 4 of Publication 946.