Your home is not only your castle, it can be the source of most of your itemized deductions. Know what the law allows for deductibility of home offices, home equity loans, second homes, and capital gains and losses from selling your home. And be sure to contact us with any questions.

Office In The Home

If you operate a business out of your home, it's time to celebrate! Thanks to a liberalization of the tax law that took effect this year, you now may be able to take an office-in-the-home deduction. Now, a home office will qualify as your "principal place of business" if (1) you use the office to conduct administrative or management activities for the business, and (2) there is no other fixed location in which you conduct these activities. The home office space must be used regularly and exclusively for business. Any personal use of the area will make you ineligible for the deduction. Also, if you're an employee, the exclusive use of the home office must be for the convenience of your employer.

You may deduct a percentage of your homeowner's insurance, home repairs, utilities equal to the percentage of space the office occupies. Plus, you can deduct all improvements to the office if they relate to the conduct of business.

If you own your home, you can depreciate the portion you use for business (Over 39.5 years); and if you rent, you can deduct a portion of your rent. The deduction cannot exceed your income from the business, but excess deductions can be carried forward. You may also deduct the portion of your home used on a regular basis to store inventory or product samples.

Exceptions to the "Regular & Exclusive Use" Test:

• If you use your home as a "licensed day-care facility" for children, handicapped persons or persons over age 65, you would be eligible for the home office deduction because your home is used in this capacity on a regular basis.

• If you store products (inventory, sales samples) in your home on a regular basis, you will be eligible to take the home office deduction provided your home is your principal place of business. The area used must be a specific area that is appropriate for storing products.

Principal Place of Business - Redefined

For 1999 and years thereafter, there is a new opportunity for taking the home office deduction. You may take the deduction if you regularly and exclusively use a part of your home to perform substantial administrative and management activities of your business. This qualifies your home office as your principal place of business even if you perform other aspects of your business If you own your home, you may be able to deduct a portion of your mortgage interest, real estate taxes and depreciation. If you rent your home, you may be able to deduct a portion of your rent. In both cases, you may also be able to deduct a portion of your utilities, insurance and repairs. Repairs are only deductible if they are for the portion of the home used for business. To figure the amount deductible, you first need to figure the percentage of your home used for business. You may do this in one of two ways:

If You Qualify, What Expenses Are Deductible?

If you own your home, you may be able to deduct a portion of your mortgage interest, real estate taxes and depreciation. If you rent your home, you may be able to deduct a portion of your rent. In both cases, you may also be able to deduct a portion of your utilities, insurance and repairs. Repairs are only deductible if they are for the portion of the home used for business. To figure the amount deductible, you first need to figure the percentage of your home used for business. You may do this in one of two ways:

1. Percentage based on # of rooms (for example 1 room for business/ 10 rooms total = 10%). This method is used only if all of the rooms in the home are of comparable size.

2. Percentage based on square footage (for example: business = 200sf/2000sf total = 10%). Obviously, if only part of a room is used for business, it will be necessary to use this method.

Are There Any Limitations To The Deduction?

Yes, there certainly are limits. The Home Office Deduction is limited by the amount of net income from the business use of the home. First, expenses for casualty losses, mortgage interest and taxes are deducted from the income from the business. Next, expenses such as excess mortgage interest, insurance, repairs and maintenance, utilities, and other expenses (such as rent) are deducted. Finally, deductions that decrease the basis in your home are deducted, such as depreciation and excess casualty losses. If there is insufficient income to deduct these expenses, a carryforward of unallowed expenses is available.

Where, and How, Is The Deduction Taken?

Generally, an employee's home office expenses must be taken as a miscellaneous itemized deduction subject to the 2% floor on Schedule A. Self-employed taxpayers claim their allowable home office deductions on Schedule C. For "S" Corps. and regular "C" Corps we are advising that a lease be setup between the shareholder's spouse and the Corporation for the Fair Market Value (FMV) which is based on rental rates per square foot (s.f./ yr - i.e.: $15.00) in the business area. For Limited Liability Companies (LLCs) and Partnerships, the entity may qualify to setup a reimbursable plan. It is important to document the square footage utilized, along with executing a lease between the parties. Where the Corporate Shareholder does not have a spouse the lease can be between the corporation and the shareholder. Additionally, if the IRS were to determine that the lease does not represent FMV?, this could have a negative impact on the corporation and result in reclassification and/or disallowance of the deduction by the IRS.

CAUTION: There may be adverse consequences to taking the home office deduction - the chances of the IRS auditing your return increases for individuals who take the deduction. Plus, when you sell your home, gain may be recognized (even if the $250,000 exclusion applies to the sale) to the extent of depreciation taken after May 6,`1997, and will be taxed in the year of the sale if you are utilizing your Home Office and taking the deduction in the year of sale.