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Home-office Renovation

Discuss anything to do with property law - buying, selling property

Home-office Renovation

Postby brenn15 » Mon Dec 19, 2016 10:56 am

s About Taxes)/Home-Office Renovation Advertisement Expert: Richard Fritzler - 12/6/2007 This year, my wife and I did a major renovation of our house that included adding a partial third floor to our two story house for my office. The third floor is exclusively used for my office -- nothing else is on the floor. It is my full-time office(I work from there 8-10 hours a day). There is no "outside the home" office, and I don't use the office for anything except work.

We have very specific pricing information from the contractor on the cost of the third-floor office addition(we had a bid with the office and without the office). The third-floor office also has many "built-ins" used exclusively for my work including a long desk, book shelves, and files cabinets.

I am wondering if the company can reimburse me for the costs of construction of the third-floor office or the cost of the built-in furniture. If I am reimbursed, could the company take the full expense on its 2007 return? Are there any long-term issues with getting a reimbursement for the built-ins or construction(i.e. does the company then "own" them? Would we have to depreciate them? Would we have to reflect them on our balance sheet?). I am thinking there is a difference between the actual renovation costs, and the file cabinets, desk, etc. Am I correct? Using a square footage methodology, the company reimburses me using an accountable plan(mortgage interest, electricity, etc) each month for use of the home office.  
brenn15
 
Posts: 50
Joined: Fri Apr 01, 2011 9:15 pm

Home-office Renovation

Postby byron92 » Mon Dec 19, 2016 5:55 pm

I appreciate your goal and how you want to get there.

But as you tug and pull to get your house today to be a partially commercial endeavor so that you BELIEVE you are reducing your taxes today, you are also distorting your house so that later it will be so misshapen that lose out.

Are you willing to give up the $500,000 exemption on cap gains on your primary residence?

Do you realize the amount of work that you are in for to do what you want, then defend it when when it does not fit within the tax code?

And really how much tax are you saving? and if I can show you a way to save at least that and more without going to those extremes, would you choose that?

Over the last 20 years, there seem to be some common misconceptions. One of the big ones is that "deductions are not good . . . Deductions make bad things less bad". The bad thing is giving up the money, the less bad part is that you might get a small portion of the money back in taxes. For example: if you spend $500 on a widget, you get about $75 bucks as a tax break. That means $425 is really gone. That is still bad. Another thing is that we should not go out looking for deductions, spending money on a widget unless you really need an expensive doorstop is foolhardy, especially if you are looking at $75 back on your taxes as the reason to buy it. I'm not suggesting that spending any money is evil or bad; but spending money for a tax benefit is shortsighted. Certainly, if you want the office get the office, you deserve it, you made the money, and you get to spend it on anything you wish.

Unless you are planning to rezone your home as mixed use Residential/commercial, and condominiumize it so your business can be a buyer, you are not operating within the rules.

Even if you did get the business to buy your third floor, I'm going to guess that you are operating as some type of passthrough entity, which means it is still your money that is buying the third floor. Am I right?

I'm going to make a statement here that may seem like a reach, so I'll follow it with an explanation. "The only possible reason for anyone to be motivated to find ways to spend money to reduce taxes is that you had too much income". Too much income is the cause of too much tax, so if we reduce your income we reduce the tax. But not just the income tax, we also reduce the payroll taxes(there is no tax break against payroll or Self employment taxes for personal deductions)

If you have $75,000 that you didn't need to support your lifestyle and took it personally from your business, yes you are getting slammed on the taxes. So you now want to somehow save the taxes on that money. That is admirable, but if you really drill down, personally there is very little you can do to reduce your taxes. Most plans are not reduction but deferral. Postponing the tax till later. Accountants, financial planner, and other advisors, justify their existence and all they do on lowering this years taxes. Hoping that by the time you figure out you got hosed, they are no longer around, or if they are they'll offer another deferral plan; like if we can put it off till you die, then your kids will inherit the problem.

When you refer to "the Company" are you talking about your sole proprietorship? Because that is not a separate entity, you are the sole prop, and so you can pay for the third floor(you will anyway). And you can claim whatever tax break you want, and after a few years, when it too late to make a change, the IRS can come back and disallow all the deductions, consider it income to you and charge you all the back taxes, penalties and interest. That $25,000 of the IRS money that you thought you could use to finish out the upstairs, now costs you $75,000 of after tax dollars, which you'll need to earn first, and pay the taxes on, so that is really closer to $125,000.

I asked: If I could. . . would you? About showing you a way to save far more in taxes.

What if your business as a Real Corporation. If had made an extra $50,000 for the past 2 years that it kept and paid taxes on(15% just for the record). That would show $85,000 of available funds to loan you on your house. What is your tax rate for borrowed money? Zero, zip nada.

$85,000 upstairs, form $100,000 of contracts, not bad.

As a sole prop, sub-S, LLC or any type of partnership, that $100,000 would have been taxed far higher, at a minimum of 30.3%(Self Employment tax 15.3 on the first $50k, plus only 15% federal tax; or; over 40% as your income tax rate increases) that would have left you with $60-$70k for the build out. You want to try and make it a tax deductions,(which you would be unsuccessful at) but then when you sell the office has been depreciated, so any value attributed there would be recaptured, at regular income rates, not at long term cap gain rates. AND since the house would be unable to accurately separate the value of the residence from the business address, the IRS can either attribute your original basis in the residence as the value at sale and attribute everything else as gain on the office, which would be sweet from them or simply say that the commercial property cannot be construed as your primary residence and therefore not eligible for the exemption.

Review how much you save in taxes today and how much it costs you in taxes later, and decide even if you won would it be a good plan.

As I re-read this it may sound a bit harsh, it is not intended for that, there are just a lot of details that you need to understand. Since you are successful in your business, I would enjoy showing you how to BE a Successful business owner.

Richard Fritzler

www.owelesstax.com

phone 800 590-6612
byron92
 
Posts: 45
Joined: Sat Apr 02, 2011 4:22 am

Home-office Renovation

Postby Boyden » Tue Dec 20, 2016 1:30 am

s About Taxes)/Home-Office Renovation Advertisement Expert: Richard Fritzler - 12/6/2007 This year, my wife and I did a major renovation of our house that included adding a partial third floor to our two story house for my office. The third floor is exclusively used for my office -- nothing else is on the floor. It is my full-time office(I work from there 8-10 hours a day). There is no "outside the home" office, and I don't use the office for anything except work.

We have very specific pricing information from the contractor on the cost of the third-floor office addition(we had a bid with the office and without the office). The third-floor office also has many "built-ins" used exclusively for my work including a long desk, book shelves, and files cabinets.

I am wondering if the company can reimburse me for the costs of construction of the third-floor office or the cost of the built-in furniture. If I am reimbursed, could the company take the full expense on its 2007 return? Are there any long-term issues with getting a reimbursement for the built-ins or construction(i.e. does the company then "own" them? Would we have to depreciate them? Would we have to reflect them on our balance sheet?). I am thinking there is a difference between the actual renovation costs, and the file cabinets, desk, etc. Am I correct? Using a square footage methodology, the company reimburses me using an accountable plan(mortgage interest, electricity, etc) each month for use of the home office.  
Boyden
 
Posts: 36
Joined: Wed Jan 22, 2014 3:45 pm


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