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Primary home: real estate tax deduction with business use of home? |
Let say home value = $1,00,000 real estate tax for 1 yr. = 12,500 (@1.25% assuming CA rates) lets further assume 80% of home is used for residential purpose while 20% is used for business purpose. a) From pub 1024 A (itemized deduction), it indicates that the amount that can be deducted should not be for business use i.e., for above case only 80% of the total real estate tax can be deducted. b) Pub 587 (Business use for home) indicates that one can deduct only business % of this tax i.e., for above case only 20% of the total real estate tax can be deducted. Total deduction = 805 + 20% = 100% From above it seems that if there is NO advantage in terms of saving real estate tax if one is using his/her home for business purpose. Can someone confirm this? Thanks! There are significant advantages to placing part of the real estate tax off of schedule A. The most significant is that more people than ever are effected by AMT. It is reasonable that a CA resident who owns a million dollar home is in AMT (large state income tax deduction on sch. A). AMT calculates a parallel tax system on form 6251 with you paying the greater of regular or AMT tax. While the schedule A deduction benefits you under regular tax, the tax deduction on schedule A is disallowed in the calculation of your AMT income. However, your business deduction would remain the same. As far as you go, you are correct. You would split your real estate taxes and your mortgage interest. 80% is deducted on Schedule A, and 20% is deducted on Schedule E. The real tax advantages are from the operating expenses of your home. You cannot deduct your utilities, repairs, maintenance of your personal residence. But you can deduct these expenses for your business, in your example, 20% of the operating expenses of your home (I omit some details which appear in the instructions cited below). Another advantage is that you can depreciate the business part of your home. That is, you could depreciate 20% of your home's basis (your investment in the home) over 39 years. This is really a deferral of taxes, since when you sell the home, all of that depreciation is now taxed up to the amount of the gain on the sale of your home. IRS Instructions for Form 8829 Business Use of Home http://www.irs.gov/instructions/i8829/ch... One advantage of home business is being able to deduct the proportionate (in your example 20%) costs of insurance, maintenance, utilities, etc. expenses. |
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