Writing off construction costs
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?
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.
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.
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.