Home Office Deductions for Landlords

There aren’t many deductions for business owners that are more dreaded than home office deductions. Some tax experts are convinced that claiming this tax deduction increases the chance of an audit, although the IRS is insistent that this is just not the truth. Either way, if you abide by the rules, and maintain proper records, you should have nothing to fear.

The key to this tax deduction is that rental property owners may claim this write-off 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.

Once you have met this requirement you’ll also have to meet the basic home office deduction thresholds. For starters, you need to 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 must be your principle space for running your business.

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

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

4. You use a separate structure on your property for conducting 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 need to look into what kind of expenses can be written off. There are direct and indirect types of home office deductions. Direct expenses only benefit the home office area of your home such as cleaning or painting. Indirect expenses benefit the entire home and must be apportioned out between the office area and the rest of the house. Mortgage interest, insurance, property taxes and utilities are typical examples of indirect expenses. Square footage is the typical means of determining the proportion of the home office in relation to the entire house to come up with a percentage. A 2,000 square foot home with a 200 square foot home office area would mean 10% of the indirect expenses could be written off 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.

As you don’t want any trouble if you do get audited, you want to keep good records to confirm that you were 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 a good idea to use your home office address on your business cards and other forms of communication and to have business mail delivered to the office address. You should keep a log of client meetings and other time spent working there. Records you should keep to prove expenses include: utility bills, property tax statements, insurance premium notices, 1098 mortgage interest statements and receipts for 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 Tax Accountant.

Tax 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.

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