If you plan to convert your personal residence into a rental property, consider first selling the home to your S Corporation. You can avoid taxes on the sale with the home-sale exclusion of up to $500,000 and potentially increase the rental property’s depreciable basis, which provides for a greater depreciation deduction over the life of the rental. If you don’t sell the home to your S Corporation and instead just convert it from personal to rental-use, then you will lose the $500,000 home-sale exclusion if you rent it for more than 3 years, and you can only depreciate the historical cost of the home rather than the higher fair market value of the home.
You can take the home office deduction if you have an area of your home that is used exclusively for your business, as long as other supporting tests are met. The home office deduction is only about $1,500…that isn’t a big deal. The big deal is that the presence of the home office means that you no longer have non-deducible commuting expenses…meaning, you can now deduct the cost to get back and forth from your home to your main office. In addition, you can directly deduct any improvements you make to that space – so if you install new blinds in that office, you can deduct the blinds, or if you install a new floor in that space, you can deduct the new floor.
If you rent that home to others, then make sure that you spend no more than 14 days on the property for personal reasons (days spent on repair, furnishing, management, or upkeep don’t count as personal as long as you spend 4 hours and 1 minute during the day on repair, furnishing, management, or upkeep) so that you can deduct 100% of the expenses of that home.
If you live in the home (i.e., have more than 14 days of personal use of the home), then make sure that you conduct business for your small business in that location. That makes your home and travel to the home an ordinary and necessary business expense which might be deductible.