This section of Form 8829 can be the most daunting. Depreciating any tangible, which means you can touch or feel it - like a desk or chair, business asset can be difficult for non-accountants. Depreciating real property, which is real estate, can be difficult even for accountants. Why? Because it's not simply the cost of the asset which is used as a base for depreciation.
What is Depreciation?
Depreciation is the way the cost of long-lived assets is spread over their useful life. While there are special depreciation methods, such as depreciating under Internal Revenue Code 179 that an arts and crafts business owner can opt to use, real property is subject to very strict depreciation rules. Because of this, for this part of Form 8829, you may be better served getting professional help.Home Office Adjusted Basis or Fair Market Value
Adjusted basis is what it cost you to buy your home plus any improvements. For example, your home cost $200,000 and you made significant improvements such as installing a new heating system for $5,000. Your adjusted basis is $205,000 ($200,000 + $5,000). Fair market value is how much your house is actually worth.
The smaller of the two figures is your initial basis for depreciation your home office. Therefore, if your adjusted basis is $205,000 but your house is only worth $100,000 - unfortunately, $100,000 is the number you have to use. This figure goes on Line 36 of Form 8829.
Value of Land
Not to get into all the hoo-hah, but land is never depreciated. So you have to subtract the value of your land from the smaller of your adjusted basis or fair market value. Ok, wondering how to figure the value of your land? Well, to definitively value it, you need to have an appraisal done. Let's say the value of your land is $25,000. That figure goes on Line 37 of Form 8829.
Figuring Depreciation Allowable
Continuing on from the examples above, the lesser of your fair market value or adjusted basis of your home is $100,000. Less the value of the land, which is $25,000, your basis for your house is $75,000. This goes on Line 38 of Form 8829.
On line 39, enter your arts and crafts home office basis, which is Line 38 multiplied by Line 7 on Form 8829. Go back to page one of this article if you need to refresh your memory on how to figure Line 7 business percentage.
Line 40 is where you get into the hard part: your depreciation percentage. There is no one-size-fits-all type of instruction I can give you for this line. Your best bet is to either read the instructions for Form 8829, starting on page three and continuing to page four, or get the help of an accountant or tax return preparer.
Multiplying the figures you have on Line 39 times line 40 give you your Line 41 depreciation allowable . Enter this on Line 29 of Form 8829 too.
