Home Improvement on Rented Home

[vlouie574]

First off, Tom's website http://tomcopelandblog.com has a plethora of information. I will be signing up for kidkare.com
and will gladly sign up for The Child Care Business Partnership membership.

So my wife and I rent a house with a full basement (1000sq ft main floor and 1000 sq ft basement) Last year we spent about $25k gutting and remodeling the basement. The whole basement is now dedicated to the daycare and is used as a play area with 2 napping rooms, feeding area and 1/2 bathroom.

Can I claim the remodeling costs as a business expense?

Can I use the Exclusive Use Rule for the basement? Other than the daycare we don't use it for anything else.

Which brings me to Time-Space Percentage question. The whole main floor is 100% shared use for the daycare as well. Currently on Form 8829 on Part 1 I have 2000 sq feet with 100% usage, 3870 hours out of 8760 hours which brings me to a Time Percent of 44.17%. But based on the Exclusive Use Rule formula from your blog:

Step One: Calculate the business use percentage of the exclusive use room:
1000 square feet divided by 2,000 square feet = 50%
Step Two: Calculate the T/S% of the rest of the home:
1000 square feet of regular use space divided by 2,000 square feet = 50% Space
50% Space x 44.17% Time = 22.08%
Step Three: Add the totals from Step One and Two together:
50% + 22.08% = 72.08% T/S%

Am I correct on this?

[Michael]

Welcome to the forum!

[vlouie574]

Thank you Michael!!!

[TomCopeland]

Originally Posted by vlouie574

First off, Tom's website http://tomcopelandblog.com has a plethora of information. I will be signing up for kidkare.com
and will gladly sign up for The Child Care Business Partnership membership.

So my wife and I rent a house with a full basement (1000sq ft main floor and 1000 sq ft basement) Last year we spent about $25k gutting and remodeling the basement. The whole basement is now dedicated to the daycare and is used as a play area with 2 napping rooms, feeding area and 1/2 bathroom.

Can I claim the remodeling costs as a business expense?

Can I use the Exclusive Use Rule for the basement? Other than the daycare we don't use it for anything else.

Which brings me to Time-Space Percentage question. The whole main floor is 100% shared use for the daycare as well. Currently on Form 8829 on Part 1 I have 2000 sq feet with 100% usage, 3870 hours out of 8760 hours which brings me to a Time Percent of 44.17%. But based on the Exclusive Use Rule formula from your blog:

Step One: Calculate the business use percentage of the exclusive use room:
1000 square feet divided by 2,000 square feet = 50%
Step Two: Calculate the T/S% of the rest of the home:
1000 square feet of regular use space divided by 2,000 square feet = 50% Space
50% Space x 44.17% Time = 22.08%
Step Three: Add the totals from Step One and Two together:
50% + 22.08% = 72.08% T/S%

Am I correct on this?

You are correct based on the following assumptions. You don't have a garage and the basement area is never used personally. That means you don't have a furnace or laundry room in the basement.

The remodeling cost of the basement is a home improvement that is depreciated over 39 years under normal rules. However, since you use it more than 50% for your business, you can apply the Section 179 rule and deduct 100% of the cost in one year, no depreciation. The downside to using Section 179 is that if you go out of business before the end of 39 years you will have to repay some of this deduction. If you are planning to be in business for at least 5 years or so, this is still a good deal to use this rule.

[Blackcat31]

Just curious but does the fact that OP is a renter and doesn't own the home change things? I mean how can a renter claim home improvements on a home they don't technically own? Just out of curiosity.

[TomCopeland]

Originally Posted by Blackcat31

Just curious but does the fact that OP is a renter and doesn't own the home change things? I mean how can a renter claim home improvements on a home they don't technically own? Just out of curiosity.

Renters can deduct home improvements that they pay for even though they are renting, since they paid for it!

[Firefly]

So in the above example where they finish off their basement and use it for daycare, use section 179 but go out of business in 5 years, how much of that deduction would need to be repaid?

[vlouie574]

Originally Posted by TomCopeland

However, since you use it more than 50% for your business, you can apply the Section 179 rule and deduct 100% of the cost in one year, no depreciation. The downside to using Section 179 is that if you go out of business before the end of 39 years you will have to repay some of this deduction. If you are planning to be in business for at least 5 years or so, this is still a good deal to use this rule.

That's great to hear! So would that be line 14 on the Form 4562?

[TomCopeland]

Originally Posted by Firefly

So in the above example where they finish off their basement and use it for daycare, use section 179 but go out of business in 5 years, how much of that deduction would need to be repaid?

A home improvement is depreciated over 39 years. So, if she goes out of business in 5 years she will have to report as income the amount of 34 years of depreciation.

[TomCopeland]

Originally Posted by vlouie574

That's great to hear! So would that be line 14 on the Form 4562?

If you used Section 179, that goes on Form 4562, Part I. If you depreciated the home improvement it would go on line 19i.

Line 14 is for items other than home improvements or home additions that cost more than $2,500 and are using the new 100% bonus depreciation rule.