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The old method requires a lot of record keeping. There is now a simpler method based on square footage.
Keep in mind that you can only use the office space for business purposes. You cannot also use it as a guest room or allow children to surf the web on the office computer.
so for small business perspective, I should buy the house with mortgage then
right?
What are you doing with the cash now?
If the money is just going to sit in a bank earning 2% then pay cash. If the money is going to sit in the stock market then I would borrow.
Compare the after tax interest rate to the rate of return you would otherwise earn. Stocks tend to have a geometric return of about 10% and bonds tend to return 6%.
Yeah, no mortgage, no interest deduction. You can deduct a portion of utilities and take some depreciation for business purposes, but when you sell, a portion of the gain (if you sold at a gain) will be taxed and the depreciation may get recpatured as income.
Why would you want to pay interest that you do not need to just to be able to deduct it and get only a fraction of it back?
The nearly ubiquitous misconception that it is better to have an expense or lose income for the sake of a deduction that is always less than the value of the loss.
Think long and hard about taking a home office deduction. You can only deduct the % of the house that is used ONLY for an office--so if your "office" is also a spare bedroom, for example, you can't take the deduction. The biggest concern is that home offices trigger IRS audits at a fairly high rate. Is it really worth the few bucks you will save on your taxes?
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