Discussion:Equity Interest/Home Office Confusion

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Discussion Forum Index --> Advanced Tax Questions --> Equity Interest/Home Office Confusion


Discussion Forum Index --> Tax Questions --> Equity Interest/Home Office Confusion

Death&Taxes (talk|edits) said:

14 November 2013
I am reading an article in NATP's TaxPro Journal, Fall 2013, regarding the safe harbor method of computing the home office deduction. The authors make the statement, when discussing drawbacks of the safe harbor method, "Use of the safe harbor method of determining home office deductions may also affect the amount of alternative minimum tax (AMT) paid by some taxpayers. Recall that AMT adjustments include property taxes paid on a residence and interest paid on home-equity indebtedness. When the safe harbor method is adopted, Schedule A may include more of these adjustment items."

I have always used the 8829 instructions in regard to Home Equity interest:

"On line 10, include only the total of your mortgage interest and qualified mortgage insurance premiums that would be deductible on Schedule A and that qualifies as a direct or indirect expense. Do not include mortgage interest on a loan that did not benefit your home (for example a home equity loan to pay off credit card bills, .......)"

At first I thought the authors to be misleading, but then came to the conclusion that they tried to simplify, for interest on equity loans for non-residence purposes is subject to AMT anyway, but reading the article made me try to find where Code, Regulations, Rulings and the like make this determination. Oddly, Publication 587 and Publication 936 say nothing about it, nor can I find anything in 280A.

Where did this clause in the instructions come from? Anyone?

Ckenefick (talk|edits) said:

14 November 2013
I think you'll see the word "allocable" in 280A and definitely in the Regs. With HO's, we have direct, indirect and unrelated. Interest on a HELOC used to buy a car wouldn't be allocable, in any part, to the home office. As such, said interest would be unrelated to the operation of the home and wouldn't be deductible, at all, on Form 8829.

Article does seem misleading.

WEISSEA (talk|edits) said:

15 November 2013
"Recall that AMT adjustments include property taxes paid on a residence and interest paid on home-equity indebtedness.When the safe harbor method is adopted, Schedule A may include more of these adjustment items."

A somewhat muddled statement but in the case of property taxes otherwise lost for a taxpayer subject to AMT, when used in OIH actual expenses taxpayers gets a benefit of reducing net profit and also SE tax whereas if using OIH safe harbor no benefit. In case of non improvement use HELOC, HELOC interest lost to AMT and no help for eihter actual OIH expenses or safe harbor because there is not even an indirect business benefit as stated above.Somewhat like if I paint my kitchen, no OIH allocation as there is no indirect OIH benefit. Considering no carryovers, no depreciation, must use OIH 15 days month,$1500 max deduction based on a 300 sq ft OIH( pretty large office) plus above AMT impacts, I am hardpressed to see why anyone would use the safe harbor method.

Death&Taxes (talk|edits) said:

15 November 2013
Sometimes you read something and wonder if you have been doing it right all these years, and since the authors did not qualify the possibilities with HELOC interest, I decided to find the basis for what I have done and was surprised that the only out and out statement was in the form instructions, usually the worst reliable source.

I can think of one or two clients with paid-off mortgages who might; these same people may have been in business since 1982 or so and depreciation is no longer a factor.....but you are right, for most clients actual expenses are a no-brainer.

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