Tax tactics: what to claim when you work from home

5 Dec 2011 |

It is common for owners of a small business to use their home for running their business. For some people with a large mortgage it can seem attractive to class it as a place of business and claim a tax deduction for some of the interest on the mortgage. The ability to do this can have a capital gains tax cost.

Q. You recently answered a question about someone who was going into business and rented their home. I run a plumbing business from home. We own the property and have a $307,000 mortgage. I built a shed to store my equipment tools etc. Can you tell me what I can claim?

A. The first thing that must be established is whether your home is your principal place of business or you are just using a part of the home to assist you in running the business. The tax office has issued guidelines that assist business owners to establish which category they fit in.

For a home to be a place of business an area must be set aside for the exclusive use of the business. This will often mean that the office must have a separate entrance from the residential part of the home, and it is clear that the office cannot be used for private purposes.

If the home cannot be established as being a principal place of business the tax deductions are limited to the occupation costs. These include the cost of electricity and gas related to the office, telephone costs related to business calls, and depreciation of office furniture and equipment.

When a home is a place of business tax deductions can also be claimed for a proportion of the following expenses:

  • interest on the mortgage, 
  • depreciation of the building costs if the home was built after approximately 1985, and
  • rates and taxes.

A reasonable basis for calculating the proportion to be claimed is on an area basis.

In your situation as you have built a shed that relates to your business, if you also have an office in your home that is specifically set aside for the use of the business, you will be able to claim a larger proportion of the properties costs. These would include the interest on your $307,000 mortgage and the rates and taxes.

If you build your shed after moving to the property and borrowed money to fund this, in addition to the depreciation you can claim on the cost of building the shed, you will so be able to claim all of the interest related to this borrowing.

The downside to classifying a part of your home as a principal place of business will be the loss of the capital gains tax residence exemption for that part of your home. As you will more than likely qualify as a small business owner the tax impact of this can be reduced by claiming the small business active asset exemption and retirement exemption on this assessable capital gain.

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