Legal to "rent" office space to yourself?

[swbsam]

My wife wants to put her degree in design to use and work as a designer for hire - she's done it before and it's a nice additional income. If we start a legit company (and pay taxes, etc.), would it be legal to convert our basement into an office (suitable for clients and for a gallery) and charge a below market value rate to ourselves?

I'm figuring the tax benefits would be substantial, unless the "additional income" offsets any benefit.

I'm talking like $300-500, not the $1,000+ we'd spend getting office space in New York City.

edit: we own the house and the basement is currently unfinished, refurbishing it to be client-ready will cost a few grand. if that can eventually be offset by tax incentives then it would be a no-brainer

 

[Fern]

Do you rent or own the house?

Fern

 

[Babbles]

I don't know about the legality of doing that, but it seems like a lot of work for probably not much benefit. Your wife, I assume, would be able to deduct the expenses of paying rent however your homestead would have to include the "income" of the rent and therefore pay taxes on it.

 

[swbsam]

Originally posted by: Fern
Do you rent or own the house?

Fern

Sorry, i should have been clearer - we own the house - it's a two family and we're renting two floors and live in 2 floors. the basement is unfinished but we're thinking of remodeling it into a gallery/office space for her.. it'll cost some money to do so so offsetting that expense through tax incentives would make it an easier pill to swallow

 

[Brainonska511]

If it is an incorporated business, you could probably easily set it up so the business is renting from you.

 

[vi edit]

Why not just do a home office deduction?

 

[swbsam]

Originally posted by: Brainonska511
If it is an incorporated business, you could probably easily set it up so the business is renting from you.

So I've heard, but is there really a benefit to this, or would it just taking money from one pocket to put in the other?

 

[Phoenix86]

Originally posted by: Brainonska511
If it is an incorporated business, you could probably easily set it up so the business is renting from you.

I'm leaning this way as well, as long as the business are separate entities....

 

[wedi42]

talk to an accountant.
i think you can deduct a part of you mortgage and other home expenses as a business expense.
i think it's based on percent of square footage used for businesss

 

[IceBergSLiM]

how would the net outcome be any difference than a home office deduction?

 

[chorb]

My old roommate did this (not sure on the details), but he was able to use some of his mortgage as a tax write off, as well as his car, and even video games as "market research". When it came to tax time he would have a 5 inch think stack of papers and cost him $800 bucks to have it all done. You should probably talk to a non armchair tax adviser before you proceed.

 

[IceBergSLiM]

Originally posted by: chorb
My old roommate did this (not sure on the details), but he was able to use some of his mortgage as a tax write off, as well as his car, and even video games as "market research". When it came to tax time he would have a 5 inch think stack of papers and cost him $800 bucks to have it all done. You should probably talk to a non armchair tax adviser before you proceed.

your friend got ripped off. My accountant does mine for 160.00

And I don't need a stack of papers all my transactions are conveniently stored online by my bank and i download the summary at the end of the year and store it at my hard drive.

 

[xSauronx]

Originally posted by: swbsam

Originally posted by: Brainonska511
If it is an incorporated business, you could probably easily set it up so the business is renting from you.

So I've heard, but is there really a benefit to this, or would it just taking money from one pocket to put in the other?

my dad does this, and has for a while, with his business.

granted, its an entirely different building from his home, but he rents the place to the business.

Originally posted by: wedi42
talk to an accountant.
i think you can deduct a part of you mortgage and other home expenses as a business expense.
i think it's based on percent of square footage used for businesss

yeah do that. an hour of an accountants time (if even that) should answer your questions on the matter.

 

[swbsam]

Originally posted by: IcebergSlim
how would the net outcome be any difference than a home office deduction?

Well, as a small business (and as a woman, and me as a minority. ha!) I think she may be able to get grants, and part of those grants could be spent on refurbishing her new office space, on top of any tax benefits.

This is still in the very formative phases and we haven't thought everything out - we just moved in a few weeks ago!

Thanks for any thoughts before we head to an account. we don't have an account yet

 

[Fern]

Originally posted by: swbsam

Originally posted by: Fern
Do you rent or own the house?

Fern

Sorry, i should have been clearer - we own the house - it's a two family and we're renting two floors and live in 2 floors. the basement is unfinished but we're thinking of remodeling it into a gallery/office space for her.. it'll cost some money to do so so offsetting that expense through tax incentives would make it an easier pill to swallow

I'm a tax CPA and generally tell my clients who own not to bother, but yeah you can do it.

The below FMV rent will cause problems if the IRS founds out (too lazy to look up the rule for that now).

The rent itself is a wash on your personal return (as long as the corporate entity she sets up is tax as a pass-through entity - S-corp etc).

Basically the benefits to doing so are: the cost of your house that you allocate to the basement portion w/b depreciated over 39 yrs, and any utilites and r/e taxes you allocate to it w/b become deductible. The improvements you make will also depreciated over 39 yrs. (Mortgage interest is already deductible on Sch A).

On the downside, when you later sell the house you may pay tax on the (recaptured) depreciation, and if the basement is still busines use property any gain allocated to that will be coverted from what was non-taxable (sale of perosnal residence) into taxable.

Then there's the PITA, if not extra costs, associated with the calculations and tax return etc.

All-in-all, IMO it's a bunch of work etc for very little benefit (and possibly a bunch of extra tax in the case of an otherwise taxfree sale of a home). You might wanna run the numbers to check for yourself.

Hope that helps

Fern

 

[sactoking]

Yes, it is legal for one legal entity (yourself) to rent space to another legal entity (your business) if they both have similar ownership. You have to make sure that the business is a separate legal entity though, which means an LLC, S-corp, or C-corp. If it's a proprietorship or one of the many forms of partnership it won't work.

I see this all the time in the construction business entities I underwrite.

 

[Fern]

Originally posted by: IcebergSlim

Originally posted by: chorb
My old roommate did this (not sure on the details), but he was able to use some of his mortgage as a tax write off, as well as his car, and even video games as "market research". When it came to tax time he would have a 5 inch think stack of papers and cost him $800 bucks to have it all done. You should probably talk to a non armchair tax adviser before you proceed.

your friend got ripped off. My accountant does mine for 160.00

And I don't need a stack of papers all my transactions are conveniently stored online by my bank and i download the summary at the end of the year and store it at my hard drive.

Umm.. Well before you run off saying he got ripped, think for a moment that a big stack of papers is likely gonna take a helluva lot more time than a computerized summary.

Fern

 

[olds]

Ask EagleKeeper

EDIT
Only read the title and didn't realize that Fern had posted.

 

[BoomerD]

As Fern points out...CAN you? Yes, under some circumstances.

SHOULD you? Maybe...Maybe not. Depending on the actual usage of the rest of the house, perhaps just taking the "home office" deduction would create fewer problems...and maybe reduce the chance of an audit.

http://www.irs.gov/newsroom/ar...e/0,,id=108138,00.html

http://www.irs.gov/newsroom/ar...e/0,,id=172239,00.html

http://www.irs.gov/newsroom/ar...e/0,,id=163079,00.html

http://www.irs.gov/businesses/...e/0,,id=204169,00.html

 

[Caecus Veritas]

yes, you can lease part/all of your own building to yourself (as a separate entity).
you would report rental income on your personal TR.
You can expense part of the property's repair & maintenance costs (i wonder if you can expense depreciation as well) on your personal TR.
You would expense rental expense on your business TR.
You can expense alot of "other" household expenses which otherwise would not have qualified.
usually, you'll end up saving money because of all the other write-offs.

 

[rivan]

Originally posted by: Phoenix86

Originally posted by: Brainonska511
If it is an incorporated business, you could probably easily set it up so the business is renting from you.

I'm leaning this way as well, as long as the business are separate entities....

My wife uses part of our home for business (not our own business, but our garage is perpetually 50%+ full of her work stuff, along with her office and some space in the basement) use and we get a significant tax benefit from reporting it as such. It's based on the square footage used and the costs for that square footage, including mortgage costs, utilities, etc.

Her work doesn't *rent* it from us, but we still get a benefit from the situation.

I'm not sure how that would change were you to formally *rent* the space to your business.

Originally posted by: wedi42
talk to an accountant.
i think you can deduct a part of you mortgage and other home expenses as a business expense.
i think it's based on percent of square footage used for businesss

Best advice here. You'll presumably be speaking to a CPA about other business matters anyway. Bring this up.

 

[DrPizza]

Originally posted by: IcebergSlim

Originally posted by: chorb
My old roommate did this (not sure on the details), but he was able to use some of his mortgage as a tax write off, as well as his car, and even video games as "market research". When it came to tax time he would have a 5 inch think stack of papers and cost him $800 bucks to have it all done. You should probably talk to a non armchair tax adviser before you proceed.

your friend got ripped off. My accountant does mine for 160.00

And I don't need a stack of papers all my transactions are conveniently stored online by my bank and i download the summary at the end of the year and store it at my hard drive.

I think that $800 was $160 for the return, $640 for the risk he's taking.

 

[JS80]

Originally posted by: Fern

Originally posted by: swbsam

Originally posted by: Fern
Do you rent or own the house?

Fern

Sorry, i should have been clearer - we own the house - it's a two family and we're renting two floors and live in 2 floors. the basement is unfinished but we're thinking of remodeling it into a gallery/office space for her.. it'll cost some money to do so so offsetting that expense through tax incentives would make it an easier pill to swallow

Cliffs: it's a bunch of work etc for very little benefit

There I cliffed it for you.

 

[swbsam]

Thanks guys, looks like we'll have to talk it over with a CPA, after she gets her LLC paperwork taken care of.

 

[IceBergSLiM]

Originally posted by: Fern

Originally posted by: IcebergSlim

Originally posted by: chorb
My old roommate did this (not sure on the details), but he was able to use some of his mortgage as a tax write off, as well as his car, and even video games as "market research". When it came to tax time he would have a 5 inch think stack of papers and cost him $800 bucks to have it all done. You should probably talk to a non armchair tax adviser before you proceed.

your friend got ripped off. My accountant does mine for 160.00

And I don't need a stack of papers all my transactions are conveniently stored online by my bank and i download the summary at the end of the year and store it at my hard drive.

Umm.. Well before you run off saying he got ripped, think for a moment that a big stack of papers is likely gonna take a helluva lot more time than a computerized summary.

Fern

He's still an idiot. I just categorize my deductions and give the summary to my accountant. If I need back up I can refer to the bank reports.