Live-in landlords: Nail down bigger home-office deductions

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in Small Business Tax,Small Business Tax Deduction Strategies

Normally, you must depreciate the cost of business or commercial real estate over 39 years. In comparison, you can depreciate residential rental property much faster over 27.5 years.
 

Strategy: You can speed up depreciation deductions if you're a live-in landlord. According to a new IRS ruling, you're entitled to the shorter write-off period for a home office located in a residential building that you rent out to others. (IRS Chief Counsel Advice 200526020)
 

Case facts: A taxpayer owned an apartment building that contained eight similarly sized apartment units. He lived in one of the apartments and rented out the other seven. The taxpayer devoted one-sixth of his personal apartment exclusively to a home office.
 

People who want to qualify for faster depreciation deductions for residential property must meet these two tests:
 

1. At least one unit must actually be rented to provide living accommodations (and no more than half of all units may be rented on a transient basis).
 

2. At least 80 percent of the building's rental income must be rental income from dwelling units.
 

Since the taxpayer qualified under both tests, the IRS said he can depreciate the home office under the faster write-off period for residential property. (The IRS will now revise Publications 587b and 946, which previously stated that the longer 39-year period must always be used for a home office, regardless of the building type.)
 

The additional annual depreciation deduction from using 27.5-year write-off period instead of 39 years will run about 1.07 percent of the cost of the home-office space. For high-rent districts, that tax difference can result in thousands of extra tax dollars each year.

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