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Using legal settlement to purchase a home studio

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tombyrne

Member
What is the name of your state? California. Can I partially shield monies won in a 2018 legal settlement via mediation by investing them back into my business? I took about 55% of the award up front and structured the rest over next 5 years. I am a sole proprietorship and the investment would be a home in which I build my new studio and for which I've always deducted partially in the past. One last bit of info: I won the settlement for an illegal eviction that forced me from my previous studio of 17 years. Thanks
 


FlyingRon

Senior Member
Buying real estate and other capital assets are not something you can deduct from your income. As you seem to know, you can take deductions for certain expenses in maintaining your place of business. See IRS PUB 587 https://www.irs.gov/pub/irs-pdf/p587.pdf. Yes, I know that is the 2017 version but I don't think the changes in the 2018 code affect this much since you are self-employed.

Not familiar with anything that allows you to roll this into new investments (like 1031).
 

tombyrne

Member
Buying real estate and other capital assets are not something you can deduct from your income. As you seem to know, you can take deductions for certain expenses in maintaining your place of business. See IRS PUB 587 https://www.irs.gov/pub/irs-pdf/p587.pdf. Yes, I know that is the 2017 version but I don't think the changes in the 2018 code affect this much since you are self-employed.

Not familiar with anything that allows you to roll this into new investments (like 1031).
I use my studio as my exclusive and regular place of doing business, as well for the storage of all my photographic and editing equipment. I meet with clients in my studio. I'm self-employed and use this space exclusively to ply my trade: to perform work, to find work, admin and storage. I won the award bc/ I was illegally evicted from my former apt. in which I also had this exclusive space, and even performed my work during the mediation to help win the award (I have a legal graphics business). I've now the opportunity to purchase a home which I'll use in the same way. Not a business expense? Not qualify to deduct my legal fees?
 

FlyingRon

Senior Member
It's not an expense because you're buying a capital asset. It makes no difference if you are a sole proprietor or a FORTUNE 500 corporation. Capital assets purchases can't be expensed against income.

What legal fees are we talking about? Generally, legal fees incurred in the course of your business ARE deductible.

I suspect you really should be talking to a tax professional.
 

tombyrne

Member
It's a complicated situation in that I'm planning on purchasing the property and renting a couple rooms out as well as using this home for my exclusive studio. It's in motion but won't settle before midnight tonight obviously so I guess it's a moot point
 

adjusterjack

Senior Member
The purchase price is not a deductible expense.

Are you going to live in the home or are you living someplace else and commuting to the studio?

To whom will you rent out rooms? To people who will live there or to others who will live elsewhere and commute?

If your purchase doesn't close before midnight tonight then you will have plenty of time to figure out how to handle it on your 2019 taxes and I suggest you consult a tax pro about it.
 

LdiJ

Senior Member
It's a complicated situation in that I'm planning on purchasing the property and renting a couple rooms out as well as using this home for my exclusive studio. It's in motion but won't settle before midnight tonight obviously so I guess it's a moot point
Its a moot point for 2018 but it won't be a moot point for 2019. You really do need a face to face consult with a tax professional. However I will tell you that buying a property, even if its to be used for your business, is not an up front tax deduction. You can however deduct expenses in running your business and you can deduct depreciation annually. Please get a consult with a local tax professional before you finalize the deal.
 

tombyrne

Member
The purchase price is not a deductible expense.

Are you going to live in the home or are you living someplace else and commuting to the studio?

To whom will you rent out rooms? To people who will live there or to others who will live elsewhere and commute?

If your purchase doesn't close before midnight tonight then you will have plenty of time to figure out how to handle it on your 2019 taxes and I suggest you consult a tax pro about it.
I'll be living in the home. The renters will be living in their rooms as if it were any apt./home. The weird position is that I could be considered running a rental property business (as opposed to investment prop) with consistent attention to maintenance, repair, advertising for tenants, etc. And I'm aware that the rental vs. investment situation comes with certain tax advantages. At the same time I'll be using the property as I have my other apartment from which I ran my studio in San Francisco for 17years, using a portion of it as an exclusive studio from where I do the greater greater majority of my work. So I'm also aware that that has tax advantages as well. I'm not sure if these two positions are at odds or not...
 

tombyrne

Member
Its a moot point for 2018 but it won't be a moot point for 2019. You really do need a face to face consult with a tax professional. However I will tell you that buying a property, even if its to be used for your business, is not an up front tax deduction. You can however deduct expenses in running your business and you can deduct depreciation annually. Please get a consult with a local tax professional before you finalize the deal.
yes, a tax professional...or a tax attorney...or some hybrid. The monies which have opened this opportunity to me won through a legal settlement and the new tax code takes a radically different position in their regard. I get that post-purchase there are many attractive tax advantages available to me. Thanks for your reply
 

adjusterjack

Senior Member
The monies which have opened this opportunity to me won through a legal settlement
You keep saying that but it's irrelevant with respect to the purchase of the home in 2019.

Any tax issues on the settlement are handled on your 2018 return.

I'm not sure if these two positions are at odds or not...
They aren't. You allocate the parts of the home to the various functions and apply the appropriate percentages to your expenses. Your rental activity goes on Schedule E, your business goes on Schedule C, you'll file Self-Employment on Schedule SE, you'll probably have some depreciation to take on the part of the property not used as your residence. It's a bit involved but not impossible and there is tax software that you can use to make it easier.

Meantime the IRS website has publications that you can review to get an idea of what's coming.

You're not the first one who has ever done this.
 
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