Home Office Deductions for Landlords: An Overview

Many tax payers are leary of home office deductions, concerned that these tax deductions are more likely to inspire an IRS audit. The IRS claims there is no legs to this claim. No matter the case, follow the rules and you should have no concerns.

The key to this tax deduction is that rental property owners may claim this deduction if they are active, which is to say you must do more than cashing checks. If you consistently 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 solely for running your business as a rental property manager.

Additionally, you must meet at least one of the following conditions:

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

2. You have no other fixed location where you perform the administrative activities that are required to operate your business.

3. You connect with clients there.

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 qualify for the home office deduction, you will need to look into what kind of expenses are tax deductible. There are direct and indirect types. Direct expenses solely benefit the home office area of your home such as painting or cleaning. Indirect expenses benefit the entire structure and must be apportioned out between the office area and the rest of your house. Mortgage interest, insurance, property taxes and utilities are common examples of indirect expenses. Square footage is the conventional means 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 if the house is sold.

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

This subject matter can get quite intricate 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.

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

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