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Thanks, XXXXX XXXXX requesting me again.
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.
Then, to account for your home office, just use a simple average based on Jjanuary 1.
I would also list association fees as "other"
Is there anything else you need?
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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.)
Just deduct the mileage on the car, you won't deduct mileage and depreciation
you can't depreciate your car
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.
If you are claiming mileage you don't need to file this form.
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.
That is correct
Thank you for help.
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.)
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?
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?
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?
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.