By Bart B. Sokolow, PhD. and Paul Wylie
RISMEDIA, Oct. 28, 2008-Pssst…Want to know a secret about lowering your gas use, eliminating commute time, reducing business overhead, cutting back on your carbon footprint, and increasing tax write-offs?
More and more California cities, including Los Angeles, have passed special zoning laws that permit tenants to live and work at the same address. And unlike most at-home workers, live/work tenants can meet with clients, staff on-site employees, and apply for business licenses at their home addresses. Best of all, they can work from home and write off more of their expenses. Perhaps most importantly, they can control their own destiny by owning the space.
“Sure, a person can telecommute and spend some time working at home instead of the office, but this is something different,” said Lawrence Johnson, an accountant with Lawrence Johnson and Associates who uses the live/work solution to reduce business costs and taxes for some of his clients.
Under the City of Los Angeles zoning ordinance, qualifying professionals can apply favorable tax and zoning laws that allow them to legally combine their living and working spaces.
“The principal tax advantage of a live/work unit is that it is generally much easier to substantiate regular and business use of the business space if challenged by the IRS,” said Keith R. Gercken, a tax attorney and partner with Sheppard Mullin Richter and Hampton, LLP. “The live/work unit also tends to be helpful in validating certain other requirements for taking a home office deduction, such as the fact that the office space is the taxpayer’s principal place of business or that it is used to meet with clients.”
Consider Josh, a graphic designer whose company just purchased a two-story loft zoned as an “artist’s loft” in Los Angeles. Josh lives on the second floor of his loft; the first floor is entirely dedicated to his business. This means that Josh’s subchapter “S” graphic design corporation shoulders a big bulk of the mortgage payment. It works like this:
After meeting with a tax professional, Josh determined that his corporation can buy the entire space and rent the upstairs back to himself as an individual. His company is an “S” corporation, but the law also applies to “C” corps, partnerships, and limited liability companies. His company, in turn, deducts as legitimate business expenses all of the property taxes, interest payments, insurance, association dues, improvements, depreciation, and other expenses. Josh’s company then leases a portion of the space back to him individually for residential purposes.
Josh has pulled the rabbit out of a hat-a very productive and legal rabbit.
Working from home, and subsequently deducting rent isn’t new, but the newly zoned live/work spaces are. These new legal zones have created a platform whereby workers can more easily establish that their homes have designated areas carved out solely for business. Unlike a telecommuter who works from home, work/live businesses are not required to allocate business expenses on a per-square-foot basis. Owners have the ability to fully deduct expenses.
Traditional home-based businesses do a poor job of keeping their business spaces entirely separate from their workspaces. Guest rooms are converted into office spaces, which might also store hide-a-beds for out-of-town guests; dens are allocated to at-home businesses, though family members relax on the couch watching television in the evening hours.
“The live/work spaces have created a more distinct line between home and work,” said Trent David, a real estate agent with Coldwell Banker Beverly Hills. “A strength coach can turn the first floor into a conditioning room, reserving the upstairs for living.”
In addition to addressing the IRS’s concerns, live/work spaces also alleviate a top complaint of at-home workers. Often, home offices begin growing, eventually spilling into an entire home. Workers have a hard time separating their personal life from their professional life.
“I felt like I could never get away from work,” said Ben Baven, one of Trent David’s clients. Baven owned a traditional home-based business before David helped him buy a downtown loft. “My loft draws a clear distinction: one floor is reserved for work, the other for my home.”
Because live/work spaces are always located in commercially zoned areas, structures have built-in workspaces that clearly distinguish them from the living quarters.
It gets even better. The U.S. Small Business Administration allows lenders to provide up to 90 percent of the purchase price to qualifying businesses with at least 51 percent of the space dedicated to business. The program provides great common sense qualifications considering income from a variety of sources that includes the historical business income, pro forma business income, spousal income, salaried income, and alternative incomes.
The SBA loan program allows companies to acquire a loan with only 10 percent down, a payment that can be made by either the company or individual. The loan, up to $2 million, can be fixed-rate or variable, depending on the borrower’s choice. And when it comes time to sell, the live-work spaces are generally eligible for a tax-deferred exchange under IRS code 1031. This provision provides favorable tax options, avoiding the dollar gain limitations and occupancy restrictions imposed on typical residences.
“In today’s economic climate, this is something any qualifying small business owner should consider,” said Karen Crosby, a private mortgage banker with Wells Fargo.
Qualifying professions include, but are not limited to:
Artists and artisans
Computer software and multimedia-related professionals
Fashion, graphic, interior, and other designers
Health and fitness professionals
Insurance, real estate, and travel agents
Marketing, advertising, and public relations professionals
Rather than buying or leasing separate spaces for living and working, combining the two is a cost-efficient, lifestyle-efficient alternative. In dollar-to-dollar comparisons, a combined live-work unit generally will save a tremendous amount of money even before considering the significant tax advantages, gasoline savings, and thirty-second commute. Being in a community of like-minded people will only enhance the opportunities.
“When you layer in the quality of life, the live-work experience is unbeatable,” said David.
About the authors: Bart B. Sokolow is an environmental consultant with Environmental Advisors, Inc. He can be reached at (818) 907-6565 or by e-mail at email@example.com. Paul Wylie is the founder and former CEO of Metrocities Mortgage. He can be reached at (818) 878-9581 or by e-mail at firstname.lastname@example.org.
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