Publication 587 |
2001 Tax Year |
Depreciating Your Home
If you own your home and qualify to deduct expenses for its
business use, you can claim a deduction for depreciation. Depreciation
is an allowance for the wear and tear on the part of your home used
for business. You cannot depreciate the cost or value of the land. You
recover its cost when you sell or otherwise dispose of the property.
Before you figure your depreciation deduction, you need to know the
following information.
- The month and year you started using your home for
business.
- The adjusted basis and fair market value of your home at the
time you began using it for business.
- The cost of any improvements before and after you began
using the property for business.
- The percentage of your home used for business. See
Business Percentage, earlier.
Adjusted basis defined.
The adjusted basis of your home is generally its cost, plus the
cost of any permanent improvements you made to it, minus any casualty
losses or depreciation deducted in earlier tax years. For a discussion
of adjusted basis, see Publication 551.
Permanent improvements.
A permanent improvement increases the value of property, adds to
its life, or gives it a new or different use. Examples of improvements
are replacing electric wiring or plumbing, adding a new roof or
addition, paneling, or remodeling.
If you make repairs as part of an extensive remodeling or
restoration of your home, the entire job is an improvement. You must
carefully distinguish between repairs and improvements. You must also
keep accurate records of these expenses. These records will help you
decide whether an expense is a deductible or capital (added to the
basis) expense.
Example.
You buy an older home and fix up two rooms as a beauty salon. You
patch the plaster on the ceilings and walls, paint, repair the floor,
install an outside door, and install new wiring, plumbing, and other
equipment. Normally, the patching, painting, and floor work are
repairs and the other expenses are permanent improvements. However,
since the work gives your property a new use, the entire remodeling
job is a permanent improvement and its cost is added to the basis of
the property. You cannot deduct any portion of it as a repair expense.
Adjusting for depreciation deducted in earlier years.
Decrease the basis of your property by the depreciation you
deducted, or could have deducted, on your tax returns under the method
of depreciation you properly selected. If you took less depreciation
than you could have under the method you selected, decrease the basis
by the amount you could have taken under that method. If you did not
take a depreciation deduction, decrease the basis by the amount you
could have deducted.
If you deducted more depreciation than you should have, decrease
your basis by the amount you should have deducted, plus the part of
the excess deducted that actually decreased your tax liability for any
year.
If you deducted the incorrect amount of depreciation, see How
Do You Correct Depreciation Deductions? in Publication 946.
Fair market value defined.
The fair market value of your home is the price at which the
property would change hands between a buyer and a seller, neither
having to buy or sell, and both having reasonable knowledge of all
necessary facts. Sales of similar property, on or about the date you
begin using your home for business, may be helpful in figuring the
property's fair market value.
Figuring the Depreciation Deduction for the Current Year
If you began using your home for business before 2001, continue to
use the same depreciation method you used in past tax years.
If you began using your home for business in 2001, depreciate the
business part as nonresidential real property under the modified
accelerated cost recovery system (MACRS). Under MACRS, nonresidential
real property is depreciated using the straight line method over 39
years. For more information on MACRS and other methods of
depreciation, see Publication 946.
To figure the depreciation deduction, you must first figure the
part of the cost of your home that can be depreciated (depreciable
basis). The depreciable basis is figured by multiplying the percentage
of your home used for business by the smaller of the following.
- The adjusted basis of your home (excluding land) on the date
you began using your home for business.
- The fair market value of your home (excluding land) on the
date you began using your home for business.
Depreciation table.
If 2001 was the first year you used your home for business, you can
figure your 2001 depreciation for the business part of your home by
using the appropriate percentage from the following table.
MACRS Percentage Table for
39-Year Nonresidential Real Property
Month First Used for Business |
Percentage To Use |
1 |
2.461% |
2 |
2.247% |
3 |
2.033% |
4 |
1.819% |
5 |
1.605% |
6 |
1.391% |
7 |
1.177% |
8 |
0.963% |
9 |
0.749% |
10 |
0.535% |
11 |
0.321% |
12 |
0.107% |
Multiply the depreciable basis of the business part of your home by
the percentage from the table for the first month you use your home
for business. See Table A-7a in Appendix A of
Publication 946
for the percentages for the remaining tax years of the
recovery period.
Example.
In May, George Miller began to use one room in his home exclusively
and regularly to meet clients. This room is 8% of the square footage
of his home. He bought the home in 1992 for $125,000. He determined
from his property tax records that his adjusted basis in the house
(exclusive of land) is $115,000. In May, the house had a fair market
value of $165,000. He multiplies his adjusted basis (which is less
than the fair market value) by 8%. The result is $9,200, his
depreciable basis for the business part of the house.
George files his return based on the calendar year. May is the 5th
month of his tax year. He multiplies his depreciable basis of $9,200
by 1.605% (.01605), the percentage from the table for the 5th month.
The result is $147.66, his depreciation deduction.
Depreciating Permanent Improvements
Add the costs of permanent improvements made before you began using
your home for business to the basis of your property. Depreciate these
costs as part of the cost of the house as explained earlier. The costs
of improvements made after you begin using your home for business
(that affect the business part of your home, such as a new roof) are
depreciated separately. Multiply the cost of the improvement by the
business-use percentage and depreciate the result over the recovery
period that would apply to your home if you began using it for
business at the same time as the improvement. For improvements made
this year, the recovery period is 39 years. For the percentage to use
for the first year, see MACRS Percentage Table for 39-Year
Nonresidential Real Property, earlier. For more information on
recovery periods, see Which Recovery Period Applies? in
chapter 3 of Publication 946.
Previous| First | Next
Publication Index | IRS-Forms Main | Home
|