Home Office Deduction: Real estate taxes and mortgage interest creating a loss?

[hcliston]

TaxMonkey and ABCTax55:

I appreciate your responses to the person who asked about the home office deduction showing up as a deductible loss.

You both said that Real estate taxes and mortgage interest are allowed to create a deductible loss.

That caught me by surprise. I've been trying to find an IRS citation to show my clients.  Can you direct me to an official source for that information?

Thanks very much! 

Heather

[hcliston]

IRS Publication 587, on Business Use of your Home, says this:

"If you cannot deduct the business portion of your home mortgage interest in full this year, you will carry over the remaining home mortgage interest to a subsequent year in which you use actual expenses to figure your business of the home deduction."   and

"If you cannot deduct the business portion of your real estate taxes in full this year, you will carry over those real estate taxes to a subsequent year in which you use actual expenses to figure your business of the home deduction."

If you can, in fact, deduct these items even in a year with no business income, why would the IRS talk about carrying them forward?

Thank you!

[BobKamman]

@TaxMonkey and @abctax55 know that it depends on whether the taxpayer is itemizing or claiming the standard deduction.  Read all of Pub 587:

Certain expenses are deductible to the extent they would have been deductible as an itemized deduction on your Schedule A or, if claiming the standard deduction, would have increased your standard deduction had you not used your home for business. If the expense is indirect, use the business percentage of these expenses to figure how much to include in your total business-use-of-the-home deduction. If you are itemizing your deductions on Schedule A (Form 1040), these expenses include the following.
• Real estate taxes.
• Home mortgage interest.
• Casualty losses attributable to a federally declared
disaster.
If you are claiming the standard deduction, these expenses only include net qualified disaster losses that increase your standard deduction.

[Just-Lisa-Now-]

Is TaxMonkey still around?  Havent seen that name in a long time.

[hcliston]

BobKamman: 

Thank you. Your response is very helpful.  But I still have a concern:

The property taxes applied to the home office would not REALLY be deductible on Schedule A, because of the $10,000 limitation on deducting taxes paid. So if we take a deduction for part of the real estate taxes attributed to a home office, that will increase the client's overall deductions.

At least that's the way Intuit ProSeries is calculating it. 

And it does not seem to be what the IRS Publication 587 says.

Any thoughts on that? Is the IRS going to reject our home office deduction for part of the real estate taxes?

Thank you!

[sjrcpa]

He pops up occasionally on another forum - taxprotalk

EDIT: referring to TaxMonkey. The threading here is weird as we all know.

[BobKamman]

SALT doesn't apply to taxes paid or accrued in carrying on a trade or business or an activity described in section 212 [investment-related expenses].  

[TaxGuyBill]

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@hcliston wrote:

You both said that Real estate taxes and mortgage interest are allowed to create a deductible loss.

---

In some cases yes.  But due to court case a few years, ago, the rules changed a bit depending on if a taxpayer itemizes or not, and if the SALT limit applies.

One of your later comments seems to indicate that your client is subject to the SALT limits,  If I remember correctly, that essentially means the interest and taxes on your 8829 are less likely to create an allowable loss.

Read the Instructions for Form 8829.  Some of the expenses may go on lines 10 and 11 (which can create an allowable loss), but other expense go on lines 16 and 17 (which can NOT create an allowable loss).

https://www.irs.gov/instructions/i8829

[hcliston]

Thank you.

Yes, since I am in California (as are most of my clients) I have never seen anyone who is NOT subject to SALT limits. 

So I think you're saying that the client, who is itemizing on Sch. A, and has a home office for her Sch. C, may NOT be able to deduct a portion of real estate taxes on Sch. C.

That seems logical, but ProSeries is calculating it as if she DOES get to take the extra deduction for part of her real estate taxes.

 -- Heather

[TaxGuyBill]

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@hcliston wrote:

So I think you're saying that the client, who is itemizing on Sch. A, and has a home office for her Sch. C, may NOT be able to deduct a portion of real estate taxes on Sch. C.

---

No, that is not what I'm saying.  But that is a completely different question then your original question that was asking about claiming a loss on Schedule C.

As I said, read the Instructions for 8829.  It may take a few reads, and maybe even filing out the 8829 to see how it works, but it should make more sense after you do that.

[TaxMonkey]

Very occasionally.  Thank you for thinking of me !