Are hardwood floor improvements in a home office and exam room considered capital improvements subject to depreciation?
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Yes, hardwood floor improvements in a home office and exam room are generally considered capital improvements subject to depreciation, provided certain requirements are met. Below is a detailed analysis based on the Internal Revenue Code, Treasury Regulations, and authoritative IRS guidance.
1. Capital Improvement vs. Repair
Capital Improvement Defined:A capital improvement is an expenditure that adds value to property, prolongs its useful life, or adapts it to a new or different use. The IRS and accounting standards (GAAP) require that such costs be capitalized rather than expensed. For example, replacing worn-out carpet with hardwood flooring that enhances the property’s value and extends its useful life is a capital improvement, not a repair.
IRS Guidance:The IRS uses the “betterment” test to distinguish between repairs and capital improvements. If the flooring project improves the property’s efficiency, capacity, or value, it is a capital improvement. Installing new hardwood flooring in a home office or exam room generally meets this test, as it enhances the property’s value and utility.
2. Depreciation of Capital Improvements in a Home Office/Exam Room
Depreciation Eligibility:To be depreciable, property must:
- Be owned by the taxpayer,
- Be used in a trade or business or for the production of income,
- Have a determinable useful life,
- Be expected to last more than one year.
Application to Home Office/Exam Room:If the home office and exam room are used regularly and exclusively for business (as required by IRC §280A and explained in IRS Publication 587), then capital improvements to those areas—such as installing hardwood flooring—are depreciable.
Basis for Depreciation:The cost of the hardwood flooring is added to the basis of the home (or the business-use portion of the home). If the improvement is made after the home is placed in service for business, the cost is depreciated separately over the same recovery period as the home office area.
3. Depreciation Method and Recovery Period
MACRS Rules:- For a home office or exam room in a personal residence, the improvement is treated as nonresidential real property if the area is used exclusively for business.- Under MACRS, nonresidential real property is depreciated using the straight-line method over 39 years (mid-month convention).- If the improvement is to a residential rental property, the recovery period is 27.5 years.
Improvements Made After Placed in Service:If the hardwood flooring is installed after the home office/exam room is already in business use, the cost is depreciated as a separate asset, starting in the month placed in service, over the same recovery period as the underlying property.
Business Percentage:Only the portion of the improvement allocable to the business-use area is depreciable. For example, if the home office is 10% of the home’s square footage, only 10% of the flooring cost is depreciable.
4. Section 179 and Bonus Depreciation
- Section 179: The cost of improvements to the business-use portion of a home is not eligible for the Section 179 deduction; Section 179 does not apply to the basis of the business part of your home.
- Bonus Depreciation: Improvements to nonresidential real property may be eligible for bonus depreciation under certain circumstances, but improvements to a home office in a personal residence generally do not qualify.
5. Safe Harbor (Simplified Method) Option
If you use the IRS simplified method for home office deduction (the “safe harbor” of $5 per square foot up to 300 square feet), you cannot depreciate the cost of improvements (including hardwood flooring) for that year. Depreciation for that portion of the home is deemed to be zero for the year the simplified method is used.
6. Summary Table
7. Conclusion
Hardwood floor improvements in a home office and exam room are capital improvements and are subject to depreciation, provided the area is used regularly and exclusively for business. The cost is capitalized and depreciated over 39 years (nonresidential real property) using the straight-line method under MACRS, with only the business-use portion eligible for depreciation. If the simplified method is used for the home office deduction, depreciation is not allowed for that year. Section 179 expensing is not available for the business-use portion of a home.
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