Schedule C or Schedule E, or both?


N

Nanette

Client bought a building to house their sole proprietor
business. The building they bought has 3 rental units
upstairs, with their business being on the main level.
Should I file a schedule C, and also a schedule E,
separating the rental/business use. Should I separate the
cost among the two and depreciate separately. Sounds
logical, however my concern is when the building or business
is sold, would I simply divide the sales price among the
two, recapture depreciation and calculate gain or loss.
Would this send up any red flags with IRS, due to the fact
that the entire sales price is on two seperate schedules?
Would it be acceptable to include the income on the schedule
C, and take all the deductions there. I just want to do it
properly from the beginning to as not to have any problems
in the future.

Thanks for your advice!

Nanette
 
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T

Thomas Healy

Nanette said:
Client bought a building to house their sole proprietor
business. The building they bought has 3 rental units
upstairs, with their business being on the main level.
Should I file a schedule C, and also a schedule E,
separating the rental/business use. Should I separate the
cost among the two and depreciate separately. Sounds
logical, however my concern is when the building or business
is sold, would I simply divide the sales price among the
two, recapture depreciation and calculate gain or loss.
Would this send up any red flags with IRS, due to the fact
that the entire sales price is on two seperate schedules?
Would it be acceptable to include the income on the schedule
C, and take all the deductions there. I just want to do it
properly from the beginning to as not to have any problems
in the future.
This depends on whether the rental activity is significant
compared to the Schedule C business. I suspect with 3 rental
units, you need to segregate the cost between the rental
units and the business portion. You need to compare the
facts against the passive loss rules. The rental property
will be on Schedule E; if they are residential units,
depreciate over 27.5 years, otherwise 39 years.

The main level would be depreciated over 39 years in any
event.

You would also need to allocate interest expense and
property tax between the two activities as well
 
H

Harlan Lunsford

Nanette said:
Client bought a building to house their sole proprietor
business. The building they bought has 3 rental units
upstairs, with their business being on the main level.
Should I file a schedule C, and also a schedule E,
separating the rental/business use. Should I separate the
cost among the two and depreciate separately. Sounds
logical, however my concern is when the building or business
is sold, would I simply divide the sales price among the
two, recapture depreciation and calculate gain or loss.
Would this send up any red flags with IRS, due to the fact
that the entire sales price is on two seperate schedules?
Would it be acceptable to include the income on the schedule
C, and take all the deductions there. I just want to do it
properly from the beginning to as not to have any problems
in the future.
You're right on target there, Nanette, until you think about
taking everything on a schedule c.

Secret of success in accounting is..... pro rate and
allocate. No red flags to be raised.

You refer to your client as "they", but then you're talking
about a schedule c (proprietor). I take it your client is
married couple with just one of them owning THE business.

ChEAr$,
Harlan Lunsford, EA n LA
Wed 23 Feb 2005
 
A

Arthur Kamlet

Nanette said:
Client bought a building to house their sole proprietor
business. The building they bought has 3 rental units
upstairs, with their business being on the main level.
Should I file a schedule C, and also a schedule E,
separating the rental/business use. Should I separate the
cost among the two and depreciate separately. Sounds
logical, however my concern is when the building or business
is sold, would I simply divide the sales price among the
two, recapture depreciation and calculate gain or loss.
Would this send up any red flags with IRS, due to the fact
that the entire sales price is on two seperate schedules?
Would it be acceptable to include the income on the schedule
C, and take all the deductions there. I just want to do it
properly from the beginning to as not to have any problems
in the future.
Sure, create distinct assets with different class lives and
for different types of activities. You would track your
rental on schedule E and business on Sch C. Be sure to
allocate basis and expenses correctly. Include the land as
at least one distinct asset if not two.

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 
H

Harlan Lunsford

Thomas Healy wrote:

(snipped...)
The main level would be depreciated over 39 years in any
event.
This brings up an interesting point. Here's a property
where the ground floor (on schedule c) is depreciated over
39 years, while the floor(s) above might be subject to 27.5
years. Somehow this borders on the ironic, even though
that's what the code says.

ChEAr$,
Harlan Lunsford, EA n LA
thu 24 Feb 2005
 
A

Arthur Kamlet

(snipped...)
This brings up an interesting point. Here's a property
where the ground floor (on schedule c) is depreciated over
39 years, while the floor(s) above might be subject to 27.5
years. Somehow this borders on the ironic, even though
that's what the code says.
Why is this any different than the guy who rents out part of
his house and files a Sch E, and also runs a Sch C business
and claims Home office expense?

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 
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D

Don Priebe

This brings up an interesting point. Here's a property
where the ground floor (on schedule c) is depreciated over
39 years, while the floor(s) above might be subject to 27.5
years. Somehow this borders on the ironic, even though
that's what the code says.
And then you put on a new, better than the old one, sure to
increase useful life, roof. And depreciate it over ...
 
H

Harlan Lunsford

Why is this any different than the guy who rents out part of
his house and files a Sch E, and also runs a Sch C business
and claims Home office expense?
Well it's not "different", it's just ironic that parts of
the same structure should have a different life. Seems that
the politically correct people might get up in arms and
demand that all floors be treated equally. After all, we
HAVE to be FAIR! (*grin

ChEAr$,
Harlan Lunsford, EA n LA
 
H

Harlan Lunsford

This brings up an interesting point. Here's a property
And then you put on a new, better than the old one, sure to
increase useful life, roof. And depreciate it over ...
Hey, that's GREAT, Don!.

Now let's see, would you prorate the depreciation
according to square footage on all floors, or... half and
half? Or, if owner lives on second floor (with ground floor
schedule c and first floor schedule e) thirds?

Glad most of our structures in the South are on one level.

ChEAr$,
Harlan Lunsford, EA n LA
 
F

Frederick Jorden

Harlan said:
Arthur Kamlet wrote:
Well it's not "different", it's just ironic that parts of
the same structure should have a different life. Seems that
the politically correct people might get up in arms and
demand that all floors be treated equally. After all, we
HAVE to be FAIR! (*grin
All floors are equal, but some are more equal.
 
F

Frederick Jorden

This brings up an interesting point. Here's a property
Hey, that's GREAT, Don!.

Now let's see, would you prorate the depreciation
according to square footage on all floors, or... half and
half? Or, if owner lives on second floor (with ground floor
schedule c and first floor schedule e) thirds?

Glad most of our structures in the South are on one level.
But the economic value of the first floor greater than the
others. Allocations are always fun. How much rent will the
first floor generate in comparison to the second or third. A
experienced realtor could give a more appropriate value
allocation.
 
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A

Arthur L. Rubin

Hey, that's GREAT, Don!.

Now let's see, would you prorate the depreciation
according to square footage on all floors, or... half and
half? Or, if owner lives on second floor (with ground floor
schedule c and first floor schedule e) thirds?
Or perhaps the ruof could be allocated entirely to the
top floor, on the grounds that each story protects the
one below?
 

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