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George Saenz, the Bankrate.com Tax Talk columnist Writing off construction costs

Dear Tax Talk,
I am self-employed as a contractor. I built a 3,200-square-foot warehouse on my personal property in 2006 to use exclusively for my sole proprietor business. This is the same property that my home is on. Am I able to write off the construction costs?
-- Connie

Dear Connie,
You'll get to write off the construction costs, but you'll have to do so through depreciation. Depreciation is an annual allowance (deduction) for the cost of property, that is expected to last for more than one year, and that is used in an income-producing activity. A warehouse is considered real property and since it is used for commercial purposes, the cost is depreciated over 39 years or roughly 2.5 percent of the cost annually. The cost of the land on which the warehouse was built is not depreciable.

The depreciation deduction, in the first tax year you use the property, is prorated for the number of months remaining in the tax year plus a half month's depreciation for the first month. For example, if the property is placed in service in April, you get eight and one-half months' depreciation in that year. Deduct the depreciation on your Schedule C.

Section 179 allows a taxpayer to write off the cost of certain property used in business in the year it is purchased and placed into service. However, Section 179 does not apply to the cost of real property. Section 179, for the most part, only applies to equipment and furniture. Hence any equipment or furniture that you put into the warehouse would be eligible for write-off, but not the construction costs. IRS Publication 946 describes how to depreciate property used in your business.

When you sell the property and your home, you will have to allocate the sales price between your home and the warehouse. Any gain on the sale of the warehouse will be taxable income and cannot be excluded under the home-sale rules.

Bankrate.com's corrections policy-- Posted: April 27, 2007
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