Land vs Building

Today TaxMama hears from Tom in Pasadena, CA who tells us, “I am a hair stylist and I am going to start working exclusively out of my home. I will have 2 rooms of my townhouse used solely for business. When I take the depreciation for the business use of my home do I need to allocate part of the cost to land? Or since it is a townhouse, is my total purchase price for the building only and not land?”

Dear Tom,

Good question. Believe it or not, when you buy a unit in a condominium, you also own a percentage of the land in the building or complex. So yes, you will need to make the allocation.

Pull out your property tax bill. The Los Angeles County Assessor puts a valuation for land and building on the bill. Assessors in most states do that.

Use that proportion to allocate your purchase costs to the land and building. Enter the total cost of condo on Form 8829 Line 36. The cost of the land goes on Line 37. The difference will be the

cost of the building, which will be depreciated based on the business use percentage.
http://www.irs.gov/pub/irs-pdf/f8829.pdf

I have some really detailed instructions on how to maximize your office in home deduction in Chapter 7 of Small Business Taxes Made Easy. You might want to read that chapter.

Incidentally, before you go to all the expense to set up your salon, make very sure that your condominium association permits you to run a business in your home, with many clients coming to see you. Most associations have no objection to a business in the home. They DO object to lots of visitors, for security reasons. Get a WRITTEN release from the association, so future boards of directors won’t be able to forbid your business.

And remember, you can find answers to all kinds of questions about office in home and other tax issues, free. Where? Where else? At TaxMama.com

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