If you are audited, none of the real estate experts who are providing opinions to you will be able to help you.
Your question only asks regarding can you write off use of your home for business. There are limitations to writing off a business use of a home. The most important is that the write off cannot exceed the profit after all other expenses. That said, you can carry unused write off forward. Whether you can write it off also depends on whether it really makes sense to an objective third party. You have to be able to affirmatively answer questions such as, is this a real business? Do you have no other office outside of the home that is your real place of business? Is the write off not going to so negatively affect your home mortgage interest deduction so much that it makes no economic sense for you to claim a business use of home write off? Because the list of test questions is not short, and you should get tax advice whenever you open a business, I suggest you talk to an enrolled agent or CPA. This includes the other part of your question regarding the construction costs. Frankly, I doubt permits matter and legality matters to the IRS, but again, a tax adviser would help answer this question far better than a realtor
I've had Catherine Cochrane as my enrolled agent for years. She has advised my wife and me for our multiple businesses, with offices in our home, for years. She is well respected by the IRS which has kept the auditors away from us whenever we have used her. We have not been so lucky when we have not used her. Her fees are reasonable and her advice is easier to understand than most advisers. Her work phone number is 408-996-7543. If you call her, please say Mitchell and Maggie say Hi.
I wish you prosperity in your new endeavor!
I would also like to add that garage conversions are not always attractive to prospective buyers. If I were to convert my garage to partial home office, I would make sure it could easily be converted back to a basic garage prior to resale.
Have you considered just dedicating some space inside your home to your business? This would eliminate the cost of a garage conversion and protect value of your home. For a business I have, I took pictures of the rooms and portions of the rooms I use for business. When I was audited, I showed the pictures to the auditor and explained the use of the rooms as well as what the family used since we could not use that space for family. He bought the idea and calculated our percent of use of the hoe for us.
Something to discuss with your EA.
From a real estate perspective converting garages into finished space is a losing proposition. You will actually decrease the value of the property and you may want to bear in mind the expense of doing the conversion and the loss in your homes overall value (unless you have a three or four car garage and even after the conversion you have 2 a two car garage) and compare it to the tax benefits. I'd be surprised if it makes good economic sense to do this. Using an extra bedroom as a home office would make better economic sense though perhaps this isn't an option.
Home office tax deductions are normally calculated as a percentage of the total property used for the expressed purpose of conducting a business. With this said, the problem that may result is whether or not the garage is considered as an actual portion of the square footage of the home's living space. Garages, porches, sheds, etc. would not normally qualify unless they were converted according to code and recognized in the square footage on the tax records.
You could be walking a thin line here and should be certain that before doing so make sure you meet all qualifications. The IRS would be an excellent resource.
All the best to you.
Google 2012 Tax Advice on Home Offices for some basic knowledge on what can be written off and what is defined as a home office. Then find yourself an EA (Enrolled Agent) for tax advice. EA's have earned the right to go before IRS agents to represent the public. They have also taken a comprehensive IRS test which requires retesting every three years and are held to a higher standard of ethics. I've used an EA Agent for years because I know they have to be current on tax laws and have more at risk. So before you build out your garage for a home office find out what is allowed. Keep track of your receipts regardless!!!
You first need to determine whether or not you can legally convert half of your garage to office space. Then you need to contact a Certified Public Accountant who has a great deal of experience with State and Federal Income tax or you need to contact an Attorney who has a great deal of experience with State and Federal Income Tax law.
Charles Butterfield MBA
Real Estate Broker/REALTOR
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