Landscaping can be expensive, but it can also bring a lot of joy. It might also bring jail time, if you're like John Thoburn, a golf driving-range owner who, some years ago, was incarcerated for more than three months after failing to plant enough trees. After he spent $125,000 to plant hundreds of trees and shrubs, the jurisdiction where he operated his business – Fairfax County in Virginia – decided it wasn't enough.
To be sure, landscaping may not always result in jail time, but it's almost always expensive. So, why not use your landscaping to create tax savings where you can. How exactly? Read on for some ideas.
Carry on a business
I've said it before, but self-employment, even part-time, is one of the greatest tax shelters there is. Under our tax law, you're able to deduct any costs incurred for purpose of earning income from your business, so long as they are reasonable in amount. If your home represents your principal place of business, or you've set aside space in your home used solely for your work and used on a regular and continuous basis for meeting clients or customers, then you'll be entitled to claim a portion of many expenses related to the cost of your home – including landscaping. If your business area of the home is, say 25 per cent of your place, then you'll be able to deduct 25 per cent of your landscaping costs against your business income. You won't trigger the "change-in-use" rules or jeopardize your use of the principal-residence exemption, which could allow a tax-free sale of the place later, provided three conditions are met: (1) your business-use of the home is ancillary to the main use of the place as your residence, (2) there is no structural change to the property (for example, you don't renovate to create separate business premises) and (3) you don't claim capital cost allowance (that is, depreciation for tax purposes) on the home. Finally, you won't be able to create or increase a loss from your home expenses, including landscaping costs. The best you can do with these expenses is bring your business income down to zero, and carry forward any unused costs for use in a future year if necessary.
Rent out a room
If you're not interested in carrying on a business from home, think about renting out a room or two instead. The rules here work much the same as if you carry on a business in your home. That is, the portion of your landscaping costs that you can deduct against your rental income will equal the percentage of your home that is being rented out, and you'll have to meet the three conditions above if you want to avoid the change-in-use rules and preserve the ability to claim the principal residence exemption on the full property. The rule around creating or increasing a loss doesn't apply to rental income.
Decide on current versus capital
If you spend money on landscaping, some of those costs could be current expenses, which would make them deductible against business or rental income you're earning from home. On the other hand, some costs may be capital expenditures. If this is the case, the amounts won't be deductible, but should be added to your adjusted cost base of the property – which will reduce any capital gain (or increase a capital loss) later if you sell. Current expenses are those that generally reoccur after a short period, such as planting annual flowers, painting exterior wood or adding mulch to your gardens. Capital expenditures generally provide a lasting benefit and extend the useful life of your property, or improve it beyond its original condition. Examples would be the installation of a pool, re-grading the slope of your yard, or installing a sizable water feature.
Create a tax-friendly layout
Our tax law restricts the amount of land that can qualify as part of your principal residence to half a hectare (about 1.25 acres). Any land over this amount will generally not qualify for the principal residence exemption, for a tax-free sale later. There's an exception if you can show that the excess land is necessary for the use and enjoyment of the property as a residence. If you design your landscaping and the layout of your property well, you may enable that excess land to qualify for the exemption. If, for example, you set your pool further away from your house, you may end up occupying more of the land than just half a hectare. This could make that excess land "necessary for the use and enjoyment of the property as a residence."
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.