Home Office Deduction the Smart Way!

Can a home office deduction claim be filed if some former personal assets are now used for business?  The answer is yes.

The COVID-19 pandemic has changed the way people work.  Instead of being in a fancy corner office on top of a large skyscraper, people find themselves “WFH” or working from home and curious about the home office deduction.  As the working landscape changes, it would help to be aware of some tax deductions that may make the WFH situation better.

How to Claim Tax Deductions for a Home-Office

If an inherited antique chair from a grandmother is used in a work from home situation, when the chair is used 85 percent for business purposes, it can be depreciated and used to claim a tax deduction.

The law sees that the item was placed in the service of the business when the fancy chair was converted to 85 percent business use.  As the asset is depreciated, the owner may start claiming the equivalent tax deductions.

Since the chair is an antique, the value does not go down.  If it was inherited about a year ago and was appraised at $10,000, then the inherited value will be the basis for adjusting depreciation.  On the other hand, if the chair was bought for $8,000, even if it was worth $10,000 when it is converted to personal use, the $8,000 figure will still be used to determine depreciation deductions.

How to Depreciate a Formerly Personal Asset

When determining the cost (a.k.a. “basis”) to use for depreciation, use the lesser of:

  • fair market value on the date of conversion from personal to business use, or

  • adjusted basis of the property which is generally the amount paid for the asset plus the cost of any improvements.

After September 27, 2017, when an asset is changed from personal to business use, the asset must be depreciated using the 100 percent bonus depreciation if the taxpayer does not elect out of it.

For example, in January 2018 an antique clock was purchased for $10,000.  When the work from home set up started, the clock was placed in business service by moving the clock from the kitchen to the home office.  If a formal election in the tax return was not made to elect out of bonus depreciation, then a 100 percent depreciation deduction (or $10,000) on the antique clock must be made this year.  If your goal is to reduce business income, then this is a good strategy.

Unlike assets directly purchased for the business, Section 179 expense may not be used to immediately expense assets that were converted from personal to business use.

What Happens When Converted Property is Sold

When converted property is sold, a different rule is used for calculating losses compared to calculating gains.  For example a desk was bought for personal use at $8,000.  When it is converted to business use, its fair market value is determined to be $6,000 – this amount is called the “conversion basis”.  Here are the different sales scenarios for the tax consequences.  This example assumes no bonus depreciation.

  • For Losses. To calculate losses, adjusted basis is used which is “conversion basis” minus depreciation.  If the desk is sold for $4,000 and the depreciation taken was $1,000, there is a $1,000 deductible loss: $4,000 – ($6,000 – $1,000).

  • For Gains.  To calculate gains, use “original cost basis” minus depreciation.  In most cases, this will give a higher basis and less tax.  If the desk is sold for $10,000, assuming the same $1,000 depreciation, then there is a $3,000 gain:  $10,000 – ($8,000 – $1,000).  Note that if the “conversion basis” had been used it would have resulted in a $5,000 gain.

Even as a COVID-19 vaccine becomes available, the work from home option is here to stay.  It is definitely an advantage to learn how to convert personal assets for business use and take advantage of new tax deductions.

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