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I am looking into buying a house/apt that I can live in for 3-5 years, and then start renting it out.
I know there are some complications around depreciation if you SELL the property after claiming the deduction. I was wondering if the same holds true for a home office that ultimately gets turned into a rental property.
1. Are there any tax consequences of claiming a home office deduction for 3-5 years and then renting the property to tenants? I would no longer live there or do business there, and likely begin to claim home office in another residence.
2. I don't completely understand the consequences if you were to sell - is this only if you claim depreciation as an additional expense? Or does it also come into play when you are just deducting the traditional % or simplified $5/sq ft methods as well?
3. I know I can write off interest on the mortgage. Would I ever have to pay anything back if I wrote off interest on my mortgage and then either sold or rented the property?
I am looking into buying a house/apt that I can live in for 3-5 years, and then start renting it out.
I know there are some complications around depreciation if you SELL the property after claiming the deduction. I was wondering if the same holds true for a home office that ultimately gets turned into a rental property.
1. Are there any tax consequences of claiming a home office deduction for 3-5 years and then renting the property to tenants? I would no longer live there or do business there, and likely begin to claim home office in another residence.
I'm not sure what you mean by consequences. You are deducting a portion of your residence as a office. When you make the whole place a rental it gets deducted as a rental property. You lose the home office deduction, but gain the rental
2. I don't completely understand the consequences if you were to sell - is this only if you claim depreciation as an additional expense? Or does it also come into play when you are just deducting the traditional % or simplified $5/sq ft methods as well?
Way I understand it if you take depreciation deductions it gets recaptured when you sell. The whole idea is to get as many deductions as possible when you are getting income from the properties. You want to pay as little tax as possible. When you sell you're hopefully getting a large enough amount anyway from the investment that you're making money. You're gonna pay tax regardless since it's a investment. I take depreciation. Hell I'll take anything I legally can to lower my taxable amount. I'm a long term hold LL. it's my retirement vehicle. I could care less what happens after I die. It's about long term cashflow into retirement. If your dependent
are smart when they get the properties they will keep them going till their death.
3. I know I can write off interest on the mortgage. Would I ever have to pay anything back if I wrote off interest on my mortgage and then either sold or rented the property?
Mortgage interest deductions are different than depreciation or other deductions. When you sell you're only paying the principal owed amount. The interest goes away.
I've been doing something similar. I don't think it makes a difference how long you live somewhere in regards to using tax deductions for home office expenses.
Having said that, tax stuff can be a wee bit complicated. I would pay the money and speak to a tax consultant / accountant. Should only take 10 mins to sort out.
I certainly wouldn't take tax advice from strangers (including myself)
Just keep in mind that having a home office deduction on your taxes is one of the biggest red flags for audits. Weigh if it is really worth the deduction. You have to have a dedicated office space, a spare bedroom or an actual office, then you can deduct the portion of your house, utilities, etc. that is equal to the % of square footage that space is in your house. So, say you have a 10x10 room that is 10% of your house, you can deduct 10% of your utility costs, etc. as your deduction.
I am looking into buying a house/apt that I can live in for 3-5 years, and then start renting it out.
I know there are some complications around depreciation if you SELL the property after claiming the deduction. I was wondering if the same holds true for a home office that ultimately gets turned into a rental property.
1. Are there any tax consequences of claiming a home office deduction for 3-5 years and then renting the property to tenants? I would no longer live there or do business there, and likely begin to claim home office in another residence.
2. I don't completely understand the consequences if you were to sell - is this only if you claim depreciation as an additional expense? Or does it also come into play when you are just deducting the traditional % or simplified $5/sq ft methods as well?
3. I know I can write off interest on the mortgage. Would I ever have to pay anything back if I wrote off interest on my mortgage and then either sold or rented the property?
Thanks!
The Simplified Option for Home Office Deduction ($5/Square Foot Deduction) does not get recaptured. There are other differences but that one might be important to you. See here for more info
Regarding home office tax deduction if you live at the property.
My CPA advised me on a property I owned in 2005 to NOT take the him office deduction within two years (24 months) of selling it:
If you take a home office deduction on a residence that you sell, (if it was your primary residence) and have any gains from the sale, you have to pay back the amount of the deduction (tax savings) - Because the gains/profit on the sale of the home, when under $250,000 (gain, not the value of the home) are allowed tax free by the IRS.
And at that point, you have tax free gains, but a percentage of the home expenses (home office deduction) were deducted from something you realized a tax free gain from after a sale. The go back period on that is two years. And yes, the IRS is not stupid. They will send a letter, not requesting information on what's up, but rather an assessment of what is
owed, usually 12-18 months later.
Regarding home office tax deduction if you live at the property.
My CPA advised me on a property I owned in 2005 to NOT take the him office deduction within two years (24 months) of selling it:
If you take a home office deduction on a residence that you sell, (if it was your primary residence) and have any gains from the sale, you have to pay back the amount of the deduction (tax savings) - Because the gains/profit on the sale of the home, when under $250,000 (gain, not the value of the home) are allowed tax free by the IRS.
And at that point, you have tax free gains, but a percentage of the home expenses (home office deduction) were deducted from something you realized a tax free gain from after a sale. The go back period on that is two years. And yes, the IRS is not stupid. They will send a letter, not requesting information on what's up, but rather an assessment of what is
owed, usually 12-18 months later.
Great advice from your CPA, thanks for sharing.
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