Deductions for Landlords: The Home Office

Many tax payers are leery of home office deductions, concerned that these tax write-offs are more likely to inspire an IRS audit. The IRS claims there is no meat to this claim. In any case, follow the rules and you should have no concerns.

The key to this deduction is that owners of rental properties may claim this deduction if they are active, which is to say you must be doing more than cashing checks. If you routinely spend a substantial amount of time preparing and maintaining properties, you will likely qualify as an ACTIVE rental property owner.

If you meet the criteria for being an active rental property management the next requirement is that you must regularly use the office space exclusively for running your business as a rental property manager.

Additionally, you must meet one of the following requirements:

1. This office must be your principle space for running your rental property business.

2. You must have no other location from where you run the administrative end of your business

3. You use the space to meet clients and potential clients.

4. You use some other structure on your property to conduct business.

After you’ve determined that you are eligible for home office deduction, then it’s time to look at what expenses qualify for write offs. There are two major types: direct and indirect. Indirect expenses benefit the entire home. Whereas, direct expenses benefit the home office space only. Examples of direct expenses could be cleaning or painting expenses. While examples of indirect expenses can be payments on mortgage, property tax, and utilities, these expenses are apportioned out between the office and the rest of your home. This percentage is normally calculated by the square-footage ratio. To demonstrate, a 2,000 square foot home with a 200 square foot office space would mean that 10% of indirect expenses (mortgage payments, utilities, et cetera) would count toward home office deduction expenses.

Since you don’t want any trouble if you do get audited, you are going to want to maintain good records to confirm that you were/are entitled to take the deduction and that it has been accurately reported. You should document the home office space by a diagram and/or photograph that supports your square footage calculation. It is advisable to use your home office address on business cards and other forms of communication and to have business mail delivered there. You should maintain a log of client meetings and other time spent working there. Records you should keep to substantiate expenses include: 1098 mortgage interest statements, property tax statements, utility bills, insurance premium notices and receipts for any other relevant home office expenses.

This is a basic guide to home office deductions. This is not a substitute for the expert counsel of a Seattle Certified Public Accountant.

Seattle CPA +John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

 

Seattle CPAsAbout Seattle CPAs
Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has been the owner of his own small business, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

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