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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 12692
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Megan, I have some additional questions regarding renting

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Megan,
I have some additional questions regarding renting a bedroom in my home in 2012. I started advertising the bedroom on April 8. It was rented on May 27 and remained continuously rented for the remainder of 2012 for a total of 268 days. On line 1b of Schedule E I would indicate 268 Fair Rental Days. I believe that I should indicate 0 Personal Use Days since the bedroom was not used by myself or anyone else during the first 98 days of the year. If my calculations are correct, then my rental expenses are greater than my rental income, so I should use Worksheet 5-1 provided in Publication 527, Residential Rental Property. Using this worksheet the total days available for rent at fair rental price is 268, the total days available for rent but not rented is 49, and therefore the total days of rental use is 219. Since the total days of personal use is 0, the total days of rental and personal use is 219, and the percentage of expenses allowed for rental is 100%. So it appears that I would calculate the amount of rental mortgage interest by multiplying the total amount of mortgage interest I paid in 2012 (even though I did not even begin to advertise the bedroom until April 8) by the portion of my home that is rented (including one-half of the shared areas such as the kitchen). However it appears that depreciation would begin in April using the mid-month convention. Have I stated everything correctly?
Coming back to the fact that I am also using a small portion of my house as a home office, how and when do I account for fact that the space I'm renting now reduces the space of my portion of the house. For simplicity, say that my home office is 4% of the total space of my house. Now say that my renter is renting 50% of the total space of my house. So now my home office accounts for 8% of my portion of the house. But to calculate the actual percent to use on line 7 of Form 8829, do I proportionally average 4% and 8% based on the date that the bedroom began to be rented (May 27), the date that the bedroom was advertised for rent (April 8), a depreciation mid-month convention date (April 16 or May 16), or do I calculate a simple average (6%) based on January 1 since it appears that I am able to deduct rental expenses such as mortgage interest for the entire year?
Lastly, on what lines on Form 8829 and Schedule E do you recommend listed condominium association fees? Since these fees pay for insurance, maintenance, and utilities (such as water and sewerage), I'm thinking that it would be best to include the association fees on line 21 (Other expenses) on Form 8829 and line 19 (Other) on Schedule E.
Submitted: 9 months ago.
Category: Finance
Expert:  Megan C replied 9 months ago.

Megan C :

Thanks, XXXXX XXXXX requesting me again.

Megan C :

In the first part of your question, yes you stated everything correctly. You will multiply the mortgage interest by the portion of your house you used as a rental and you would start depreciating in April using the mid-month convention.

Megan C :

Then, to account for your home office, just use a simple average based on Jjanuary 1.

Megan C :

I would also list association fees as "other"

Megan C :

Is there anything else you need?

Megan C :

If not, please rate as 'excellent' so that I may receive credit for assisting you today

Customer:

Megan, Thank you for your quick reply. It struck me as a little odd that I would be able to deduct a portion of my mortgage interest, real estate taxes, and other rental expenses that I paid over the entire year when it was until April that I began to advertise a bedroom for rent. However that is what the calculations appear to indicate. Now I have one other question. In 2012 I used my car to visit some of my clients. In total I drove about 450 miles ($250) and also paid about $120 in tolls and parking fees. I thought I could simply list these on Schedule C but because I've been using Form 4562 to depreciate a computer, it appears that I'm required to also list my car in Part V (Listed Property). Since the fair market value of my car at the time was about $40,000 and since my business mileage represents only 0.5% of the total miles driven in 2012, using the 5 year, straight line, half-year convention, I'll wind up with a depreciation deduction of $20. Am I correct in my understanding that I have to list my car on Form 4562 in order to deduct the $370 in car expenses? (I'm not concerned about getting a $20 depreciation deduction.)

Megan C :

Just deduct the mileage on the car, you won't deduct mileage and depreciation

Megan C :

you can't depreciate your car

Customer:

I understand what you're saying. Perhaps I'm a little confused by the wording of the instructions for line 9 of Schedule C (Car and truck expenses):


If you claim any car and truck expenses, you must provide certain information on the use of your vehicle by completing one of the following.


Schedule C, Part IV, or Sched-ule C-EZ, Part III, if: (a) you are claiming the standard mileage rate, you lease your vehicle, or your vehicle is fully depreciated, and (b) you are not required to file Form 4562 for any other reason. If you used more than one vehicle during the year, attach your own schedule with the information requested in Schedule C, Part IV, or Schedule C-EZ, Part III, for each additional vehicle.


 


Form 4562, Part V, if you are claiming depreciation on your vehicle or you are required to file Form 4562 for any other reason.

Megan C :

If you are claiming mileage you don't need to file this form.

Customer:

So what I indicated by bolding appears to require me to list my car on Form 4562. Perhaps what is meant is that I'm only required to list my car in Section B- Information on Use of Vehicles of Part V but not fill in Section A-Depreciation and Other Information.

Megan C :

That is correct

Customer:

Thank you for help.

Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 12692
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 3 other Finance Specialists are ready to help you
Expert:  Megan C replied 9 months ago.
Thanks, XXXXX XXXXX your positive rating. Please come back and visit me for any of your tax, finance, or social security questions. It was a pleasure working with you today.
Customer: replied 9 months ago.

Megan, I have one last question. In calculating the basis of the house I purchased 20 years ago, I replaced the existing carpet and hardwood floor (which both were in pretty bad shape) after purchasing the house. Since that time due to wear and tear I replaced the carpet and hardwood floor again. In calculating the basis, do I include both the cost of the original replacement 20 years ago as well as that of the more recent replacement or do I include just the cost of one of those replacements, and if this is the case, which one? (If I had to choose just one, I would choose the recent, more expensive replacement.)

Expert:  Megan C replied 9 months ago.
Thanks for your follow up. You could include the cost of the more recent flooring addition.

Thanks

Megan
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 12692
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 3 other Finance Specialists are ready to help you
Customer: replied 9 months ago.


Megan, I still have some difficulty in understanding how to depreciate the rental portion of house. Prior to 2012 my house had a basis of about $300,000 and 3.73% of the square feet in my house was being used as my home office. Now if I show $300,000 as the basis of depreciation on line 19h of Form 4562, then I would wind up with an excessively large depreciation amount because I will be depreciating the entire value of my house rather than the portion (about 45% or $135,000) that is used by my renter. Consequently I believe I should show $135,000 on line 19h. If I am correct, then doesn't the amount that is the basis by which I can claim a home office deduction changes from $300,000 to 55% of $300,000 which is $165,000? Of course the percent that I am using as my home office in my "downsized" home has increased to 6.79%. Should I list this new basis on line 19i of Form 4562 as well as line 36 of Form 8829? Should all other amounts shown on lines 9 through 21 decrease so that they're shown as 55% of their full amounts. Let me know if this approach is correct. Also, I had ordered bedroom furniture (at a cost of $2772) a couple of days before my renters arrived on May 27, 2012. The furniture was delivered in June. If I understand correctly the cost of this furniture needs to be depreciated over 5 years starting in June. I believe that I am free to use either the half year or mid quarter convention. Is that correct?

Expert:  Megan C replied 9 months ago.
Yes, you would show $135,000 on line 19h, and yes that reduced the amount of your home office deduction. Yes, you will list this new basis on line 19i and on line 36 of 8829. Yes, all other amounts should be reduced to 55% of their full amounts. And yes, depreciate your bedroom furniture over 5 years using either convention.

Thanks!

Megan
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 12692
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 3 other Finance Specialists are ready to help you
Customer: replied 9 months ago.

Megan, So it seems everything that I said is correct but I'm still not sure how I complete the forms to reflect the fact that I began looking to rent the spare bedroom in my house on April 8. (Things would be easier if I began looking to rent my bedroom on January 1.) On line 19h of Form 4562 I would indicate that the month and year that the room was placed in service was 4/12. But what about the depreciation of my home office? Since for the first 98 days of 2012, I was not seeking to rent a bedroom, everything would be the same as in previous years, that is, for my home office I would be depreciating 3.73% of a $300,000 basis. Now after April 7, for my home office I'm depreciating 6.79% of a $165,000 basis. How do I show that the previous $300,000 basis has disappeared and has been replaced (for the purposes of my home office) with a new basis of $165,000? Do I need to file two Form 4562s, one for depreciation up to April 7 and the other for depreciation after April 7? Also how do I handle Form 8829 since while the area of my home office has remained the same, the total area of my home had changed on April 8. Again do I need to file two Form 8829s?

Expert:  Megan C replied 9 months ago.
You only need one form. You would just average out everything so that the numbers just work on this year's form. Then, next year you have a clean cutoff the next year you go to do the form.

Please let me know if you need anything additional. I think you may be over thinking this one a little bit. The differences you are trying to reconcile won't amount to much at all.

Thanks!

Megan
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 12692
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 3 other Finance Specialists are ready to help you
Customer: replied 8 months ago.

 


Megan,


 


I'm a little confused about how improvements change depreciation for both the small business home office that I have as well as the room I'm renting. As I understand the basis of my home office is my home's adjusted basis minus the value of the land multiplied by percentage of my home office (in square feet) to the square footage of my entire house. My small business began in 2010. So if I improved my home in May 2012 by, say, adding a new furnace, I would show this on line 19i of form 4562. The instructions for lines 36 through 38 of Form 8829 are confusing insofar as they state to "attach your own schedule showing the cost or other basis of additions and improvements, used at least partially for business, that were placed in service after you began to use your home for business." The instructions for line 41 also say to "attach a schedule showing your computation and include the amount you figured in the total for line 41." But then these instructions state to "complete and attach Form 4562, Depreciation and Amortization, only if...you are depreciating additions and improvements placed in service in 2012." So perhaps in my case what that means is that I should attach my own schedule for any improvements made in 2010 after I began my business as well as in 2011 but for 2012 I need to use Form 4562. Is that correct? If I'm correct then in subsequent years would lines 36 through 40 remain the same as they were in 2010 (with line 40 indicating 2.564%) and I would attach a schedule showing all improvements made after 2010 with the exception of any improvements made in the current year which I would record on Form 4562? And the instructions associated with line 41 (Multiply line 39 by line 40) would no longer be applicable.


 


The instructions for line 18 of Schedule E (Depreciation expense) which I will use for the room that I am renting does not appear to require that I attach my own schedule. It only requires that Form 4562 be completed and attached if any improvements are made for the current tax year. Is that correct?


 


Finally last month the drain leading from my kitchen sink became clogged. I called a plumber who was able to unclog it but also indicated that the pipes under the kitchen sink and well as the garbage disposal needed to be replaced. The bill (which was not broken down) was $1080. So since the garbage disposal was the major expense (about $700 including labor), I think I should depreciate the entire cost. So although I can clearly depreciate a portion of the cost to the room rental (since my renter does use the kitchen), I wondering if I can also depreciate a portion of the cost to my home office since I obviously need to eat and therefore use the kitchen sink while I'm working at home? Or is the answer to this question is no because the kitchen sink is not part of my home office?


 


Anton

Expert:  Megan C replied 8 months ago.
Anton,

You're right in your first paragraph on how you handle improvements.

The instructions for line 18 of Schedule E (Depreciation expense) which I will use for the room that I am renting does not appear to require that I attach my own schedule. It only requires that Form 4562 be completed and attached if any improvements are made for the current tax year. Is that correct? YES, that is correct

Finally, the bill for the garbage disposal is a repair, you don't need to depreciate this. You can expense the bill during the current year. Repairs keep your home in the same condition. When you have to depreciate is when you improve. So, if you put a new sink in, that's an improvement and you would depreciate that. Fixing the garbage disposal is simply keeping your home in the same condition. It's a repair and a current expense.

Thanks, XXXXX XXXXX me know if you need anything else. Please rate positive so that I may receive credit for further assisting you today.
Customer: replied 8 months ago.


Megan,


 


I appreciate hearing from you that I am correcting interpretating the way that improvements should depreciated (as expressed in the first and second paragraphs of my emails).


 


However perhaps I was not clear in the third paragraph regarding the plumbing expenses that I recently incurred. In fact, the plumber did replaced my old garbage disposal with a brand new, top-of-the line garbage disposal. I looked at my receipt again and it shows the material and labor charges for this replacement to be $905. Also the plumber replaced all of the plastic plumbing tubes under sink with new, better quality metal ones at a material and labor cost of $205. The clearing of the clogged drain he did for "free" which, of course, was rolled into the listed charges. So it seems pretty clear to me that the replacement of garbage disposal should be depreciated. The replacement of the plumbing perhaps should also be depreciated since it represents an improvement. However, I believe I read that small improvements costing less than $500 can be expensed. What are you thoughts regarding this?


 


Also you had not provided a reply to the second half of the third paragraph. For future reference I am trying to ascertain whether I can depreciate a portion of the cost of the replacement of something like a garbage disposal or a hot water heater as a home office expense since while working at home I obviously will need to use hot water and the use of my kitchen.


 


Finally another question that I would like to ask is this. Is my understanding correct that even if I chose not to depreciate on my tax returns the portion of my home that I'm using as a home office as well as the room I'm renting, when I go to sell my home, I would still have to account for the tax benefit that I am entitled to due to depreciation when calculating the taxes due from the sale of the house.


 


Anton

Expert:  Megan C replied 8 months ago.
Thank you for your follow up. I would just expense the repair, but if you want to depreciate you can go ahead and depreciate. It's such small dollars.

The garbage disposal/water heater would also be deductible/depreciable for your home office.

Yes, if you did not depreciate the portion of your home that is rental/ home office, the IRS would still impose depreciation recapture upon the sale of your home.

Thanks

Megan
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 12692
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 3 other Finance Specialists are ready to help you

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