The Home Office Deduction for Landlords

There aren’t many tax deductions taken by business owners that are more dreaded than home office deductions. Some tax payers are convinced that claiming this deduction increases the odds of an audit, while the IRS is firm that this just isn’t the case. Either way, if you abide by the rules, and maintain proper records, you should have no fears.

To claim this deduction you must be active (beyond depositing monthly checks). If you regularly spend a substantial amount of time maintaining and preparing properties, you will likely fit the term “active”.

Once you’ve met this qualifier you also have to meet the basic home office deduction thresholds. To start with, you must use the home office exclusively for your rental business on a regular basis.

Additionally, you must meet one of the following requirements:

1. This office space must be the principle location from where you manage and run your business as a rental property manager.

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

3. You meet up with tenants in this home office space.

4. You use another structure on your property to conduct business.

After you have applied the threshold tests above and determined that the work area in your home does in fact meet the requirements for the home office deduction, you will need to look into what kind of expenses can be written off. There are direct and indirect types of home office deductions. Direct expenses solely benefit the home office area of the home such as painting or cleaning. Indirect expenses benefit the entire home and must be apportioned out between the home office space and the rest of the house. Mortgage interest, insurance, property taxes and utilities are common examples of indirect expenses. Square footage is the conventional way of calculating the proportion of the home office in relation to the entire house to come up with a percentage. A 2,000 square foot house with a 200 square foot home office area would mean 10% of the indirect expenses could be deducted as part of the home office deduction. You can also depreciate the house structure (not the value of the land) in the same percentage over 40 years. However, this may complicate matters when you sell the house.

As you don’t want any trouble if you do get audited, you want to maintain good records to confirm that you were entitled to take the deduction and that the claim has been accurately reported. You should document the home office space with a diagram and/or photograph that supports your square footage calculation. It is sensible 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 to keep proving expenses include: 1098 mortgage interest statements, property tax statements, utility bills, insurance premium notices and receipts for any other home office expenses.

This subject matter can get quite sophisticated and the aforementioned is only intended to give you a basic understanding of the circumstances that would allow you to take advantage of the home office deduction.

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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